Walgreen Reports Strong November & Q1’15 Sales
Walgreen (NYSE:WAG), the largest drugstore chain in the U.S., continued its topline growth with strong sales for the month of November, as well as the first quarter of fiscal 2015. At $6.36 billion, total sales for the month of November increased 4.9% year to year. For Q1 2015, the company reported sales of $19.59 billion, which was 6.8% higher compared to Q1 2014. Year-to-date sales for calendar 2014 stand at $70.52 billion, an increase of 6.0% compared to the same period last year.
Walgreen continues to see growth in its daily living business and prescription volumes. It reported the largest quarterly and fiscal year sales increases in three years last quarter. (Read Our Earnings Article) While Walgreen’s top line continues to grow, it faces ongoing pressure on gross margins.
Our price estimate of $64 for Walgreens is slightly lower than the current price estimate.
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A Quick Snapshot Of Walgreen’s November & Q1’15 Sales
Comparable store sales for the month of November grew 4.5%, while total front-end sales increased 1.3% compared with the same month in fiscal 2014. Comparable store front-end sales increased 0.8%, as the 3.3% decline in customer traffic was offset by a 4.1% rise in basket size. November pharmacy sales increased 7.6% and accounted for 65.2% of the total sales for the month. Comparable store pharmacy sales increased 6.7%. Prescriptions filled at comparable stores grew 2.6% in the month. November 2015 had one additional Sunday and one fewer Friday compared with November 2013. These calendar shifts negatively impacted prescriptions filled at comparable stores by 2.0 percentage points.
For Q1 2015, comparable store sales increased 5.8%, while front-end comparable store sales increased 1.5%. Prescriptions filled at comparable stores increased 4.2% and comparable pharmacy sales increased 8.3% in the quarter.
Focus On Lowering Internal Costs To Improve Bottom Line
Though recent trends have put pressure on margins, we believe that Walgreen’s constant focus on lowering its internal costs will help improve its bottom line in the long run. Though margins continue to grow at the front-end, the company’s pharmacy gross margin remains under pressure from: 1) higher third party reimbursement pressure; 2) increased Medicare Part D in the business mix; 3) Walgreen’s strategy to continue driving 90-day prescriptions at retail; 4) pronounced generic drug inflation on a subset of generic drugs; and, 5) the mix of specialty drugs. The company’s gross margins declined from 29.2% in fiscal 2013 to 28.2% in fiscal 2014.
Walgreen is focused on driving cost discipline across the company to offset the negative impact on gross margin. Apart from its ongoing store optimization efforts (shutting down the unprofitable stores), it is identifying additional opportunities to lower its expenses. The company expects to achieve $1 billion in cost reductions over three years by incorporating savings at the corporate field and store levels. It has put headquarters and non-labor spending reductions into immediate effect and continues to work toward greater efficiencies in its processes through Walgreens lien Six Sigma. Additionally, positive synergies from new partnerships can help improve the company’s bottom line in the future. (Read More: Walgreen’s Focus On Lowering Internal Costs Will Help Improve Its Bottom Line)
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