Earnings Preview: Walgreen

Walgreen (WAG) is scheduled to release its fourth quarter and fiscal 2010 earnings on September 28, 2010. The company is expected to earn 44 cents during the quarter and $2.12 for the full year, according to the Zacks Consensus Estimate.

Previous Quarter Highlights

Walgreen reported an EPS of 47 cents for the third quarter of fiscal 2010, which missed the Zacks Consensus Estimate of 57 cents and the year-ago quarter’s 53 cents. However, results for the quarter include 1 cent toward restructuring cost, 2 cents for the Duane Reade acquisition and 4 cents for the elimination of tax benefits for the Medicare Part D subsidy for retirees.

Net sales increased 6.1% year over year to $17.2 billion, with same-store sales (those open for more than a year) increasing 0.7%. Front-end same-store sales increased 0.1% and were affected by weak demand for discretionary goods and lower-than-anticipated sales of flu-related products.

Agreement of Analysts

Estimate revision trends among the analysts depict a negative bias for the company’s earnings in the forthcoming period. Over the last 30 days, 2 analysts covering the stock have made downward revisions for both the fourth quarter and fiscal 2010. While no upward revision has taken place for fiscal 2010, 1 analyst has increased estimate for the quarter.

The downward sentiment continues for the next fiscal as well with estimates being lowered by 3 and 4 analysts for the first quarter and full year, respectively. Moreover, Walgreen has witnessed lowering of estimates in the past seven days by 1 analyst. No upward revision has taken place.

There are a number of reasons for the negative sentiment regarding Walgreen, the primary being the economic uncertainty, which is impacting discretionary spending besides slower introduction of generics prescription reimbursement pressure and sluggish same-store sales. Moreover, increased expenses have affected margins and the tough competitive landscape continues to remain a concern.

Magnitude of Estimate Revisions

For the fourth quarter, there has not been any revision in estimates while estimates for fiscal 2010 have been lowered by 2 cents ($2.12) since the announcement of the third quarter results. However, no revision in estimates has taken place within the last 60 days. For fiscal 2011, estimates have slipped from $2.51 to the current level of $2.46 share over the past 3 months.

Surprise

Going by past trends, we believe Walgreen might miss estimates. Barring the first quarter of fiscal 2010, the company has missed expectations in the previous four quarters with a negative four-quarter average of 0.16%. This means that, on an average, Walgreen has missed the Zacks Consensus Estimate by 0.16% over the last four quarters.

Our Recommendation

Walgreen’s front-end store sales during the previous quarter were disappointing due to a weak economy and higher sales of flu-related products in the year-ago quarter. Moreover, sales were affected by slower introduction of generics, which is not expected to improve much before the end of 2011. Given these near-term challenges, we currently have a Zacks #4 Rank (short-term Sell rating).

However, Walgreen is adopting suitable strategies to position it well for bouncing back to growth as the economy recovers. Moreover, the company has a strong balance sheet, which bodes well for acquisitions. In addition, sales figures for the past three months seem to be quite encouraging. As a result, with a long-term perspective, we have a Neutral recommendation on the stock.

WALGREEN CO (WAG): Free Stock Analysis Report

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