A Late Easter Boosts Walgreen’s April 2014 Sales

Walgreen (NYSE:WAG), the largest drugstore chain in the U.S., reported another month of strong growth with an 8.8% annual increase in its April sales ($6.49 billion). 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.

Despite continued headwinds from slower generic introduction and severe weather conditions, Walgreen reported a strong Q2 2014 (ending February 2014). The company continued its growth momentum in March and April with a 4.5% and 8.8% growth, respectively. The combined sales for the two months increased 6.6% compared to the same period last year, driven by a 5.5% growth in comparable store sales. Calendar 2014 year-to-date sales for the first four months stand at $25.36 billion, an increase of 5.4% from the same period last year.

As of April 2014 end, Walgreen operated 8,699 locations across 50 states in the U.S., the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands. 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 at a slight discount to the current market price of $70.

View our analysis for Walgreen

Quick Snapshot of the April Sales

Prescription sales at comparable stores increased 3.5% compared to April 2013. Total pharmacy sales and comparable store pharmacy sales grew 9.2% and 7.3%, respectively. Pharmacy sales accounted for 64.5% of total sales. Total front-end sales increased 8.8% while comparable store front-end sales increased 8.2%, as Walgreen benefited from a late Easter this year. Customer traffic in comparable stores increased 2.6% while basket size increased 5.6% compared t0 April 2013.

Wellness Format Stores To Spur Growth

In 2011, Walgreen introduced its Well Experience store format, which offers an enhanced layout, new products selection, a completely revamped pharmacy and health care experience. Through the active interaction of team members and a new Health Guide role, Walgreen aims to enhance the overall customer experience at its stores.

Walgreen claims to have made significant progress on this initiative and operated the new format at a total of 628 Wellness stores by the end of Q2 2014. The company continues to refine its store format to integrate healthcare, provide an elevated beauty experience, and deliver seasonal and consumable convenience to meet customers’ needs.

Walgreen filled a total of 214 million prescriptions (2.8% year over year growth) and its retail pharmacy market share increased by 20 basis points (to 19%) in Q2 2014. ^[1] Its Balance reward program hit a milestone, reaching 100 million enrollments in Q2 2014. With approximately 80 million active members, Walgreen has the largest retail loyalty program in the industry. The company plans to leverage the customer insights from its reward program to further evolve its value preposition and enhance customer experience.

Increasing Private Brand Penetration & Expanded Product Range To Increase Basket Size

For the combined March and April period, Walgreen’s comparable front-end sales increased 2.1% as customer traffic in comparable stores declined 0.9% and basket size grew by 3%. We believe that the rising private brand penetration and an expanding product range will continue to expand the customer’s basket size in the future as well.

Approximately 75% of the households currently purchase private label products and 70% customers are willing to switch to private labels that cost less than their branded counterparts. Private brands have an approximate 20% penetration in Walgreen stores, and the company intends to increase this proportion to 30% over the next few years. Additionally, the introduction of new front-end products like wine, beer, beauty products and fresh food products, to cross-sell to its customers (who come in for prescriptions), will increase the average basket size per customer.

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1. Walgreen’s CEO Discusses Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, March 25, 2014 [↩]