Walgreen Keeps Its Growth Momentum With Positive Q4 Sales

Walgreen (NYSE:WAG), the largest drugstore chain in the U.S. reported its sales figure for the month of August as well as the quarter ended August 31, earlier this week. The company saw its revenue base decline in 2012 as its dispute with pharmacy benefits management company Express Scripts led to a significant loss in the number of Express Scripts’ prescriptions filled at Walgreen stores.

However, post the dispute resolution between the two companies in September 2012, Walgreen has seen its growth accelerate in subsequent months. Its sales to date stand at $48.18 billion, 3.7% higher compared to the same period last year. The company reported $6.17 billion in sales for the month of August and $17.95 billion for Q4 2013, a 5.6% y-o-y and 5.1% q-o-q growth, respectively.

Comparable store sales for Q4 2013 climbed by 4.5% while front-end comparable store sales increased 1.7% sequentially. Walgreen witnessed a 6.8% and 6.2% growth in prescriptions filled at comparable stores and comparable pharmacy sales, respectively. Pharmacy sales for August 2013 were 6.4% higher compared to August 2012, and accounted for 64.3% of total Walgreen sales in the month.

With the opening of two new stores last month, Walgreen now operates 8,585 stores across the U.S., the District of Columbia, Puerto Rico and Guam.

View our analysis for Walgreen

Percentage Of Express Scripts Prescriptions Continue To Rise

In 2012, a total of 3.76 billion prescriptions were filled in the U.S. and Walgreen accounted for 17.4% of the sales, a marginal decline from 2011 (19.6% market share) as the dispute with Express Scripts led to a loss of a major chunk of the corresponding 90 million prescriptions for the first nine months of 2012. As a result of the dispute between the two companies, many of Walgreen’s customers switched over to its competitors.

However, Walgreen and Express Scripts entered into a fresh agreement in September 2012, which allows Express customers to fill prescriptions at Walgreen stores. Walgreen claims to be winning back old customers post the deal and declared that the proportion of Express Scripts prescriptions returning to its stores continued to rise in August 2013. Prescriptions filled at comparable stores increased by 5.6% y-o-y in August.

In addition to the aging U.S. population, the increasing government expenditures on healthcare is expected to drive drug sales. The 2010 U.S. health reform legislation is expected to extend health coverage to more than 30 million uninsured Americans. Total prescription revenue earned by U.S. drugstores are expected to reach $350 billion by the end of 2015, growing at 5.3% annually. ^[1]

Walgreen has the highest number of stores in the U.S. and currently accounts for around 18% of the total retail prescription filled in the U.S. We believe that the company is in a strong position to leverage growth in prescription drug sales in the U.S.

Negative Revenue Impact By Generic Drugs Introduction

New generic drug introductions in the last 12 months negatively impacted the calendar day adjusted comparable store pharmacy sales and total comparable sales by 1.3% and 0.8% in August 2013, respectively. Generic drugs are comparatively lower priced than branded drugs.

The total generic dispensing rate, which implies the percentage of generic drugs in a consumer’s prescription, grew to 78.5% in 2012, from 74.1% and 71.5% in 2011 and 2010, respectively. Though the substitution of generic drugs will continue for the next three to five years, the pace is expected to slow down. Nevertheless, an estimated $15 billion worth of branded product will come off patent in the next three years, opening them to competition from generic drugs. ^[2]

The rising proportion of generic drugs will continue to be a headwind to Walgreen’s top line growth in the future as well.

Our price estimate of $45.36 for Walgreen is at a 10% discount to the current market price.

Understand What Drives a Stock at Trefis

1. New Study Predicts $350 Billion U.S. Pharmacy Industry by 2015, Identifies Risks to Profitability, Pembroke Consulting, July 30, 2013 [↩]
2. CVS Caremark’s CEO Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, August 6, 2013 [↩]