Walgreen Continues Its Growth Momentum In June

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Walgreen (NYSE:WAG), the largest drugstore in the U.S., reported sales of $6.28 billion for the month of June, an increase of 8.9% compared to the same month last year. 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. Despite a soft macro environment, Walgreen started its fiscal 2014 on a strong note and has retained its growth momentum so far this year. Calendar 2014 year-to-date sales for Walgreen stand at $38.13 billion, an increase of 5.9% compared to the same period last year. At $63.65 billion, year-to-date fiscal year (which ends in August) sales for 2013 grew 6.0% compared to the same period in fiscal 2014.

Higher daily living sales, strong performance in prescriptions filled and increasing pharmacy market share have all helped Walgreen see a continuous improvement in its top line growth. The addition of  new Medicare Part D customers, increasing 90-day retail scripts and the return of Express Scripts customers, are all contributing to Walgreen’s strong business fundamentals.

Walgreen believes that a focus on its three strategic growth drivers — i.e., creating a Well Experience, advancing the role of the community pharmacy and establishing an efficient global platform — will help it become a leading global pharmacy. A large footprint places the company in a strong position to benefit, both from an aging U.S. population and the Affordable Care Act’s expansion of insurance to millions of Americans.

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Our price estimate of $64 for Walgreens is at an approximate 10% discount to the current market price.

View our analysis for Walgreens

Snapshot of June 2013 Sales

Walgreen’s comparable store sales increased by 7.5% in June. Pharmacy sales for the month, which accounted for 65.2% of the total sales, grew 13.4%. Comparable store pharmacy sales and prescriptions filled at comparable stores increased by 11.3% and 7.3%, respectively. Total front-end sales increased 1.8% while comparable store front-end sales grew 1.3%. Though customer traffic in comparable stores continued to decline in June (2% lower), basket size expanded by 3.3%.

June 2014 had one additional Monday and one fewer Saturday compared to June 2013, which positively impacted prescriptions filled at comparable stores by 2.6 percentage points.

Wellness Format Stores Is Driving Growth

In 2011, Walgreen introduced its Well Experience store format, which offers an enhanced layout, a new products selection, and 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. It claims to have made significant progress on this initiative and currently operates the new format at over 600 Wellness stores. Its customer delight score increased 230 basis points in Q3 2014 and is at an all-time high for the company.

Walgreen continues to refine its store format to integrate healthcare, provide an elevated beauty experience and deliver seasonal and consumable convenience to meet customers’ needs. It filled a total of 218 million prescriptions (4.5% year-over-year growth) and its retail pharmacy market share increased by 20 basis points (to 19%) in Q3 2014. [1] Its Balance reward program hit a milestone, reaching 100 million enrollees 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 advance its value preposition and enhance customer experience.

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Notes:
  1. Walgreen’s (WAG) CEO Greg Wasson on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, June 24, 2014 []