Subsequent to the announcement of Walgreen’s (WAG) fourth quarter and fiscal 2010 results on September 28, 2010, majority of the analysts have raised their estimates for the forthcoming period.
Previous Quarter Highlights
Walgreen reported an EPS of $0.49 in the fourth quarter of fiscal 2010, surpassing both the Zacks Consensus Estimate and the year-ago quarter by $0.05. However, results for the quarter included $0.01 towards restructuring cost and $0.04 for the Duane Reade acquisition. The fourth quarter in fiscal 2009 included $0.03 per share towards restructuring costs. For fiscal 2010, the company reported an EPS of $2.12, meeting the Zacks Consensus Estimate, but was ahead of $2.02 in fiscal 2009.
Net sales for the quarter increased 7.4% year over year to $16.9 billion, marginally beating the Zacks Consensus Estimate of $16.8 billion. While comparable store sales (those open for more than a year) increased 1.5% during the quarter, sales of front-end comparable drugstores increased 1.2%. For the full year, net sales increased 6.5% to reach $67.42 billion, marginally beating the Zacks Consensus Estimate of $67.38 billion.
For a full coverage on the earnings, read: Walgreen Beats Estimates.
Estimate Revision Trends
In accordance with the company’s encouraging performance in the fourth quarter, the recent Zacks Consensus Estimate revision trends remain positive for the upcoming period.
Over the past 7 days, 6 of the 21 analysts covering the stock have made upward revisions for the current quarter with 5 analysts raising their estimates for the second quarter of fiscal 2011. The positive trend persists for fiscal 2011 also with 16 of the 25 analysts increasing their estimates in the past 7 days. In comparison, the downward revisions have been quite fewer. While no downward revision has taken place for the current quarter within the past 7 days, only 2 analysts have lowered their estimates for the current fiscal.
Gross margin in the quarter increased 70 bps to reach 28.4% primarily driven by improved efficiencies coupled with lower restructuring expenses. Although gross profit during fiscal 2010 increased by $1.4 billion, it was impacted by the current economic scenario that appears to have impacted current store sales by 2-3 percentage points, equivalent to $500 million of gross profit. Other headwinds include pharmacy reimbursement pressure and a slowdown in the rate of new generic introductions. The pace of new generic introductions is not likely to improve before the end of 2011.
The company has provided an update on its restructuring initiative, which met its goal of pre-tax savings of $500 million in fiscal 2010 and is on course for $1 billion in annual savings in fiscal 2011. During fiscal 2010, Walgreen converted or opened 1,500 stores to the CCR format, bringing the total number to more than 1,800. By the end of calendar year 2010, the company plans to have over 2,000 CCR stores.
Walgreen has experienced positive feedback for the stores converted into the CCR format. The company has been comparing the pilot store’s performance measured by four product classes with a control group of stores. For the 26- week periods ended May 29 and August 28, the pilot stores outperformed the control stores by 2.6% and 3.7%, respectively across all product classes. We also note that Walgreen has maintained its market share in Dallas and Houston, where initially CCR stores were rolled out.
Although the severe H1N1 alarm will not mark this year’s flu season, Walgreen is preparing to provide flu shots to more customers and has also increased advertising to meet the objective. According to the company, the major difference between this year’s flu season compared to the last year is associated with the flu shot required – currently, a person will be requiring one flu shot covering both the seasonal and the H1N1 strain compared to two separate shots.
Moreover, the centers for disease control and prevention (CDC) now recommends flu shots for everyone over six months of age whereas last year, the emphasis was on seniors and others with compromised immune systems. While manufacturers have made over 40 million doses this year, Walgreen is intending to deliver 15 million flu shots (priced at $30) compared to 7 million last year. To meet its objective, the company has increased the number of certified immunizing pharmacists and nurse practitioners by 10,000 to reach 26,000. Consequently, the company will be able to provide flu shots everyday compared to limited hours last year.
Another factor favoring Walgreen is its strong cash balance. The company exited fiscal 2010 with $1.9 billion of cash and cash equivalents, down from $2.1 billion at the end of fiscal 2009. During the fiscal, Walgreen returned more than $2.2 billion in the form of dividends and share repurchases to its shareholders. Moreover, in September 2010, the company completed the $2 billion share repurchase program announced in October 2009. Although the current dividend-payout ratio is 26% (for fiscal 2010), the company has set a long-term dividend payout target of 30%–35% of net earnings. Moreover, a strong cash balance is likely to support the company in making suitable acquisitions, which should drive its revenue going ahead.
Magnitude of Estimate Revisions
The magnitude of estimate revisions for the forthcoming period has been significant. In the past 7 days, estimates for the first and second quarters of the current fiscal have increased by 2 cents to 54 cents and 77 cents, respectively. Moreover, estimates for fiscal 2011 and 2012 have increased by 4 cents to $2.49 and $2.87, respectively, in the past 7 days.
We are encouraged by the fourth quarter results of Walgreen. Furthermore, we consider the acquisition of Duane Reade Holdings as a smart strategic move to help the company grow rapidly in the New York metropolitan area. We are encouraged by the company’s progress with respect to the CCR rollout and its advances made for meeting the targeted savings under the rewiring initiative. Based on a strong cash balance, the company has rewarded its shareholders and is well equipped to pursue suitable acquisitions in future. However, the current economic scenario continues to be our major concern. Additional challenges remain in the form of reimbursement issues and slower introduction of generics. We are currently Neutral on the stock which also corresponds to the Zacks #3 Rank (short term holds recommendation).