Walgreen’s Earnings: Looking For Margin Improvement

by Trefis Team
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WAG
Walgreen Co.
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Walgreen (NYSE:WAG) is scheduled to announce its Q1 FY2013 results on Friday, December 21. It recorded sales of approximately $17.5 billion in the quarter, a 5% decline over the same period last year. [1] While the company has yet to regain customers it lost to competitors like CVS (NYSE:CVS), Rite Aid (NYSE:RAD) and Wal-Mart (NASDAQ:WMT) due to its now resolved conflict with pharmacy benefits manager Express Scripts (NASDAQ:ESRX), it has successfully arrested the decline in prescriptions filled. The prescriptions count at comparable stores in November was down just 3% y-o-y, a seven percentage point improvement from a 10% decline in June. The company also faces additional costs associated with the recently launched ‘Balance Rewards’ program and store remodels as it tests new store formats and we would look for their effect on the margins.

View our complete analysis for Walgreen

Lost Prescriptions Still Impacting Sales

The company reported a ~5% decline in prescriptions filled at comparable stores during the quarter while total prescriptions declined 3%. Comparable pharmacy sales during the period declined ~11%. [1] The additional negative impact on sales is from increasing generic introductions. Prescription Drug Sales amount for 60% of our estimate for the company and we expect the drop in number of prescriptions filled coupled with generic introductions to have a negative impact on the margins.

The renewed multi-year deal with Express Scripts came into effect mid-September and the resulting improved prescription count should have a positive impact on the margins for Q1. The same holds true for the Balance Rewards program which too came into effect mid-September. The initial response to the program was good, and with almost 40 million registrations through November, we expect an improvement in customer retention. This should further boost the prescriptions count over the coming quarters. We would look for the impact of these initiatives on prescriptions during the quarter and the company’s strategy to regain remaining Express Scripts customers.

Generics proliferation to negatively impacts sales

Generic drugs also contributed to the consistent decrease of sales in comparable stores over the past three months. Generic versions of drugs generate lower total sales dollars per prescription, but higher gross profit margins and gross profit dollars, as compared with patent-protected brand name drugs. The positive impact on gross profit margins and gross profit dollars is typically significant in the first several months after a generic version of a drug is first allowed to compete with the branded version. [2]

With more branded drugs scheduled to go off patent over the next year, we expect the trend of improving margins and generics negatively impacting comparable pharmacy sales to continue. The company currently retails approximately 700 generic drugs and could be looking to add more in order to attract uninsured customers in order to mitigate the negative impact on top-line.

We have a $38 Trefis price estimate for Walgreen which is at par with the current market price.

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Notes:
  1. Walgreens November Sales Decrease 3.9 Percent, Walgreens, December 2012 [] []
  2. 2012 Annual Report, Walgreens, October 2012 []
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