Walgreen’s Balance Rewards Program Is Helping Drive Sales

Walgreen (NYSE:WAG) reported its monthly sales figures for May with total revenues higher by 4.3% to $6.22 billion. With this, the total Q3 2013 revenue for the company now stands at $18.34 billion, up 3.3% over the same period last year. ^[1]

Based on similar lines as the “Boots Advantage Card” loyalty program administered by Alliance Boots, which enables customers to earn points on purchases for redemption later – Walgreen’s Balance Rewards loyalty program has played an instrumental role in achieving sales growth, as consumers made repeat purchases in order to accumulate points on their card. The program had as many as 72 million registrations as on May 31 – a big number considering the program was launched just last September.

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May Revenue Figures Rise As Customers Return After Express Scripts Dispute

The total front-end sales grew by 3.4% year-on-year supported by additional stores opened by Walgreen during the year. In May itself, Walgreen added 10 additional stores to take its total store count to 8,560. On a comparable store basis, front-end sales increased by 1.2% as an increase in average basket size of 4.7% was partly offset by a 3.5% decrease in traffic.

The number of prescriptions filled at comparable stores increased substantially by 7.1% in May as customers continued shifting back to Walgreen after a brief hiatus due to the dispute with Express Scripts last year. The easy availability of drugs and convenience of Walgreen store locations are significant factors behind these returning consumers. Walgreen’s easy accessibility is further enhanced by the convenience of filling prescriptions using its interactive mobile application and Internet websites.

Pharmacy sales accounts for over 63% of the total store sales at Walgreen. On a comparable store basis, pharmacy sales grew by 3.8% year-on-year. Higher generic dispensing rate had a 3.7% negative impact on the comparable store pharmacy sales. Although generics have a negative impact on the top line, they provide the much-needed boost to bottom line, as they generally have higher margins than their branded counterparts do.

AmerisourceBergen To Start Distribution In August

Walgreen inked a 10-year contract with AmerisourceBergen earlier this year to source its drugs jointly and to use AmerisourceBergen’s logistics for efficient distribution of drugs to Walgreen’s stores. The contract commences in August this year, and we will be closely watching the developments. Walgreen also got the approval for buying an equity stake in AmerisourceBergen, 7% immediately and two tranches of 8% each in 2016 and 2017, making a total of 23%. ^[2]

Walgreen, jointly with Alliance Boots, currently sources about $7 billion worth of generics every year. This new agreement with AmerisourceBergen will add another $3.5 billion worth of generics to the common buying pool, possibly generating scale efficiencies. The company estimates the total synergies to be worth 100-150 million this year, slowly moving up to reach $1 billion by 2016. ^[3]

Trefis price estimate for Walgreen stands at $42, which is at a 13% discount to the current market price.

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1. Walgreens May Sales Increase 4.3 Percent, June 5, 2013 [↩]
2. Walgreens And Alliance Boots Receive Regulatory Clearance To Make Equity Investment In AmerisourceBergen, May 17, 2013 [↩]
3. Walgreen’s Management Presents at 38th Annual dbAccess Healthcare Conference, May 30, 2013 [↩]