Earnings Preview: Walgreen

Walgreen Co. (WAG) is scheduled to release its fiscal second quarter earnings on Tuesday, March 22, 2011, before the market opens.

The company is expected to earn 80 cents per share, according to the Zacks Consensus Estimate.

The company has already reported $18.46 billion of total sales for the fiscal second quarter, up 8.7% from $16.99 billion in the year-ago period. Comparable store sales (those open for more than a year) increased 4% during the quarter, while front-end comparable store sales also increased 4% with prescriptions filled at comparable stores increasing by 4.5%.

Previous Quarter Highlights

Walgreen reported EPS of 62 cents in the fiscal first quarter, comfortably beating the Zacks Consensus Estimate of 54 cents and the year-ago earnings of 49 cents. The prior year’s EPS included 3 cents in restructuring charges associated with the company’s “Rewiring for Growth” initiative.

Net sales for the quarter increased 6% year over year to $17.3 billion, mostly in line with the Zacks Consensus Estimate.

Comparable store sales increased 0.8% while sales of front-end comparable drugstores edged up 0.4%. Prescription sales, which represented roughly 66% of revenues in the quarter, rose 5.3% year over year. Walgreen expanded its retail pharmacy market share by 40 basis points to 19.7% from the year-ago quarter. The company opened/acquired 121 new drugstores in the quarter versus 172 a year-ago.

Estimate revision trends among analysts depict a positive bias for the company’s earnings in the second quarter. Over the last 30 days, estimates have been raised by 7 analysts with none moving in the opposite direction. The same positive bias can be witnessed for fiscal 2011 as well with 6 analysts increasing their estimates and one moving lower.

Recently, Walgreen decided to sell its PBM business to Catalyst Health (CHSI) for $525 million in cash. Subsequent to this deal, Walgreen will be able to better focus on its 7,700 drug stores. We expect an update from the company regarding this transaction.

We are also awaiting an update regarding sales trends, Walgreen’s Customer-Centric Retailing (CCR) initiative and the progress on the Rewiring initiative. At the end of the first quarter, the company converted 2,100 CCR stores, representing almost 30% of the chain and plans to convert almost 5,500 existing stores by the end of 2011. Moreover, beer and wine has been rolled out in almost 5,000 stores, up from around 2000 in November 2009.

Walgreen is preparing to provide flu shots to more customers. Through the season until February, the company had administered nearly 6.4 million shots. The company is likely to update its status on flu vaccination during the conference call.

For the second quarter, estimates have gone up by a penny to 80 cents in the past 30 days. Similarly, for fiscal 2011, estimates have increased by the same magnitude in the same amount of time and stands at $2.61.

Surprise

Analyzing past trends, Walgreen has missed estimates in two of the last four quarters. However, the company has a four-quarter average surprise of 1.1%.

Our Recommendation

We are encouraged by Walgreen’s recent decision to sell its PBM business to better focus on its drugstores. Moreover, the company has made satisfactory progress with respect to the CCR rollout and meeting the targeted savings under the rewiring initiative. The benefits from these initiatives will be experienced over a period of time.

Leveraging on its strong cash balance, the company has rewarded its shareholders and is also well equipped to pursue suitable acquisitions in future. However, Walgreen has been impacted over the past few quarters by high unemployment levels and lower discretionary spending.

We have a ‘Neutral’ recommendation on the stock, which also corresponds to the Zacks #3 Rank (‘Hold’) in the short-term.

WALGREEN CO (WAG): Free Stock Analysis Report

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