Illinois-based drug retailing chain Walgreens Co. (WAG) reported robust sales for the month of June. Following the news release, the company's share price inched up 0.7% to eventually close at $73.58 yesterday.
Walgreens posted 8.9% year-over-year rise in sales to $6.3 billion in June this year from $5.8 billion in June 2013. Comparable store sales increased 7.5% in the month.
Walgreens' total comparable store sales were positively affected by 1.7% due to calendar day shifts, while it was negatively affected by 0.9% due to generic drug introductions in the last 12 months.
Walgreens' total front-end sales increased 1.8% in the month, while front-end sales in comparable stores grew 1.3%. Customer traffic in comparable stores decreased 2%, whereas basket size rose 3.3% from the year-ago level.
Prescriptions filled at comparable stores at Walgreens were up 7.3% (up 4.7% on a calendar day-shift adjusted basis) in the month. As per Walgreens' management, a calendar shift has resulted in 2.6% rise in prescriptions filled at comparable stores, since the month had one additional Monday and one fewer Saturday, compared to the same month a year ago.
Walgreens' total pharmacy sales increased 13.4% on a year-over-year basis. It accounted for 65.2% of total sales in June 2014. Pharmacy sales in comparable stores rose 11.3% (or 8.7% on a calendar day-shift adjusted basis). On a calendar day-shift adjusted basis, generic drug introductions in the last 12 months adversely impacted comparable store pharmacy sales by 1.4%.
Walgreens' sales for the first six months of 2014 climbed 5.9% to $38.1 billion from $36.0 billion in the first half of 2013. For the first 10 months of fiscal 2014, sales rose 6% to $63.65 billion from $60.0 billion reported for the same period in fiscal 2013.
Walgreens opened 15 stores in the month, including 3 relocations, and closed 13. Nearly all the June store closings were part of the company's previously announced efforts to optimize its asset base by shutting down a total of 76 drugstores.
As of June 30, 2014, Walgreens operated 8,319 store locations in 50 U.S. states, the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands, including 8,215 drugstores (up 117 from the year ago level). The store count includes 70 net stores acquired over the last 12 months.
Walgreens also operated infusion and respiratory services facilities, specialty pharmacies and mail service facilities. Its Take Care Health Systems subsidiary controls more than 400 in-store convenient care clinics.
Our Take
No doubt the generic wave in the pharmaceutical industry has been adversely affecting Walgreens' store pharmacy sales and posing a threat to the company's profitability for quite some time. This is evident from the contraction in the company’s gross margin by 48 basis points in the third quarter of the fiscal year on account of generic drug price inflation and Walgreen's fewer brand-to-generic drug conversions.
However, the company has been working tirelessly to improve its efficiency, so that it can provide high quality and cost effective pharmacy services, which in turn will reduce total pharmacy costs.
In the upcoming quarter, Walgreens expects generic drug introductions to rise to the point where it will no more be a drag on margins. In addition, although gross margin contracted, both pharmacy and front end margins benefited from purchasing synergies from the company's joint venture with Alliance Boots.
At the end of May 2014, Walgreens had 81 million active Balance Rewards members. This will allow the company to extend its offers to a large number of customers. Moreover, Walgreens opened 39 new drug stores in the third-quarter of fiscal 2014 in an attempt to optimize its store footprint.
We look forward to synergies from the Alliance Boots deal, which contributed 15 cents per share to Walgreens' third-quarter fiscal 2014 earnings. The company has estimated that accretion from Alliance Boots in the fourth quarter of fiscal 2014 will be 6 to 7 cents per share on an adjusted basis.
Currently, Walgreens holds a Zacks Rank #3 (Hold). Some better-ranked medical stocks that warrant a look are Akorn, Inc. (AKRX), Amsurg Corp. (AMSG), and ANI Pharmaceuticals, Inc. (ANIP). All these stocks carry a Zacks Rank #1 (Strong Buy).
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