Recently, Walgreens (WAG) introduced its new store brand Nice! in the US. Under this label, over 400 high quality grocery and household products will be priced at 30% lower than other national brands. Walgreens plans to include almost all Nice! products on its stores within early 2012 and expects to add more products under this brand going forward.
With Nice!, Walgreen aims to streamline its offering range for customers to identify high quality essentials at a lower price. Walgreens expects this strategic development to strengthen its private brand business including consolidation of other brands in its existing portfolio.
Over the past several years, Walgreen has been taking a number of steps to align its assets with core strategies. As the fastest growing store brand operator, the company is confident about the strong prospects of private brand sales in the US, which have increased from $64.9billion in 2005 to $88.5 billion in 2010. Thus the company believes Nice!, which is introduced as a more refined form of its private brand business, to bode perfectly well with the company’s business.
Walgreens is also focusing on store expansion coupled with operating acumen and fiscal conservatism. The company opened /acquired 41 new drugstores (a net gain of 25 after relocations and closings) in the third quarter, 2011 compared with 361, including 258 Duane Reade drugstores (or a net gain of 342) in the year-ago quarter. Walgreen expects organic store growth in the range of 2.5%-3% in fiscal 2011.
We are also encouraged by Walgreen’s strategic decisions, including the sale of the PBM business to Catalyst Health (CHSI) and the acquisition of drugstore.com. Moreover, the company has made satisfactory progress with respect to the CCR rollout and meeting the targeted savings under the rewiring initiative. The benefits from these initiatives will be realized over a period of time.
Leveraging on its strong cash balance, the company is well equipped to pursue suitable acquisitions in future. However, Walgreen has been impacted by high unemployment levels and lower discretionary spending over the past few quarters.
We have a ‘Neutral’ recommendation on the stock.
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WALGREEN CO (WAG): Free Stock Analysis Report
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