Walgreen Sustains Its Growth Momentum In March

After reporting a strong Q2 2014 last month, Walgreen (NYSE:WAG) continued its growth momentum by reporting strong sales for the month of March 2014. At $6.43 billion, Walgreen’s March sales grew by 4.5% annually. Having lost its positive growth momentum in 2012, Walgreen’s top line growth re-accelerated since the company resolved its dispute with pharmacy benefits management company Express Scripts in September 2012. Walgreen has been winning back old customers post the deal and the proportion of Express Scripts prescriptions returning to its stores continues to rise.

Walgreen believes that a focus on its three strategic growth drivers — i.e., creating a Well Experience, advancing the role of community pharmacy and establishing an efficient global platform — helps it become a leading global pharmacy. As of March end, the company operated 8,688 locations across 50 states in the U.S., the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands. It plans to open a total of around 55 to 75 stores in fiscal 2014. A large footprint places the company in a strong position to benefit, both from an aging U.S. population and from the Affordable Care Act’s expansion of insurance to millions of Americans.

Our price estimate of $64 for Walgreen is almost in line with the current market price.

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Quick Snapshot of the March Sales

Despite a 0.3% negative impact of lower flu incidence in the month, Walgreen’s prescriptions filled at comparable stores increased by 5.1% in March 2014. Total pharmacy sales and comparable store pharmacy sales increased by 8.9% and 8.o% respectively. Total front-end sales and comparable store front-end sales declined 2.6% and 3.4% year over year, respectively, mainly on account of the shift of Easter to the month of April. Customer traffic in comparable stores declined 4% while basket size increased 0.6%.

Year-to-date fiscal 2014 sales stand at $44.39 billion, 5.4% higher compared to the same month last year.

Negative Impact Of Generic Drugs To Ease Out Towards The End of 2014

Generic drugs are comparatively lower priced than branded drugs, and thus put pressure on Walgreen’s top line growth. The company has benefited from a lower generic substitution in the last few months.

The total generic dispensing rate, which factors the percentage of generic drugs in a consumer’s prescriptions, grew to 78.5% in 2012, from 74.1% and 71.5% in 2011 and 2010, respectively. The generic wave peaked in Q1 2013 and hit a trough in Q1 2014. Generic drug substitution has a 1% negative impact on comparable prescription sales in Q2 2014,  compared to a 1.3% and 6.0% negative impact in Q1 2014 and Q2 2013, respectively.

Walgreen anticipates the rate of decline in new generics introductions to moderate in the current quarter and turn positive towards the end of the year. Despite the slow substitution, an estimated $15 billion worth of branded products will come off patent in the next three years, opening them to competition from generic drugs. ^[1]

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1. CVS Caremark’s CEO Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, August 6, 2013 [↩]