Illinois-based major drug retailing chain Walgreen Co. (WAG) recently reported solid sales results for Nov 2014. Following the news release, the company's shares rose 1.7% to eventually close at $67.90 yesterday.
Walgreens posted a 4.9% year-over-year rise in sales to $6.36 billion. Comparable store sales increased 4.5%.
In the month, Walgreens' total comparable store sales were negatively affected by 1.3% due to calendar day shifts, while it was also negatively affected by 1.3% due to generic drug introductions in the last 12 months.
Walgreens' total front-end sales increased 1.3% from the year-ago period, while front-end sales in comparable stores grew 0.8%. Customer traffic in comparable stores declined 3.3%, whereas basket size rose 4.1% from the year-ago level.
Prescriptions filled at comparable stores at Walgreens were up 2.6% (up 4.6% on a calendar day-shift adjusted basis) in Nov 2014. As per Walgreens' management, a calendar shift has resulted in 2% decline in prescriptions filled at comparable stores, since the month had one additional Sunday and one fewer Friday, compared to the same month a year ago.
Walgreens experienced a positive impact of 0.1% on prescriptions filled at comparable stores owing to a year-over-year increase in flu shots.
Walgreens' total pharmacy sales increased 7.6% on a year-over-year basis and accounted for 65.2% of total sales in Nov 2014. Pharmacy sales in comparable stores rose 6.7% (or 8.7% on a calendar day-shift adjusted basis).
Calendar day shifts had an adverse effect of 2% on pharmacy sales in comparable stores. On a calendar day-shift adjusted basis, the generic wave in the pharmaceutical industry dragged comparable store pharmacy sales by 1.9% in the month, while higher number of flu shots led to an increase of 0.1% in comparable store pharmacy sales.
Season-to-date flu shots administered at pharmacies and clinics were almost 7 million, up 14.8% year over year.
The company opened 24 stores (including 12 relocations) and closed down 1 during the reported month.
With November, the company ended its first quarter of fiscal 2015. In this quarter, Walgreens recorded an improvement of 6.8% year over year in total sales to $19.6 billion, comfortably beating the Zacks Consensus Estimate of $19.34 billion. According to Walgreens, in the first quarter, comparable store sales increased 5.8% with 1.5% increase in front-end comparable store sales. Prescriptions filled at comparable stores increased 4.2% and comparable pharmacy sales increased 8.3%.
Calendar year 2014 sales to date were $70.52 billion, reflecting an increase of 6.0% from $66.52 billion in 2013.
As of Nov 30, 2014, Walgreens operated 8,330 store locations in 50 U.S. states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands, including 8,229 drugstores (up 30 from the year ago level). The store count includes 13 net stores acquired over the last 12 months. The company also operates infusion and respiratory services facilities, specialty pharmacies and mail service facilities.
Our Take
There is no doubt that 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 100 basis point-contraction in the company's gross margin in the fourth quarter of fiscal 2014. The downside is possibly attributable to generic drug price inflation and Walgreen's fewer brand-to-generic drug conversions.
During fiscal 2014, the company experienced cost increases on a subset of generic drugs. Walgreens expects this generic inflation to continue in fiscal 2015. Currently, management is tirelessly negotiating with its payers to raise reimbursement rates to protect the company against increasing generic drug procurement costs.
Zacks Rank
Currently, Walgreens retains a Zacks Rank #3 (Hold). Some other well-placed stocks worth reckoning in the medical sector are Affymetrix Inc. (AFFX), Biogen Idec Inc. (BIIB) and ANI Pharmaceuticals, Inc. (ANIP). All the three stocks sport a Zacks Rank #1 (Strong Buy).
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