Earnings Scorecard: Walgreen

Subsequent to the announcement of Walgreen’s (WAG) first quarter of fiscal 2011 results on December 22, 2010, majority of the analysts have raised their estimates for the forthcoming period.

Previous Quarter Highlights

Walgreen reported first-quarter fiscal 2011 (ended November 30) EPS of 62 cents, comfortably beating the Zacks Consensus Estimate of 54 cents and the year-ago earnings of 49 cents. The year-ago quarter’s results include 3 cents per share in restructuring charges associated with the company’s “Rewiring for Growth” initiative. Net income for the quarter leapt 18.8% year over year to $580 million riding on higher sales and improved pricing.

Revenues rose 6% year over year to $17.3 billion, mostly in-line with the Zacks Consensus Estimate. Comparable store sales (those open for more than a year) 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.

For a full coverage on the earnings, read: Walgreen Tops, Profit Cruises

Estimate Revision Trends

In accordance with the company’s encouraging performance in the first quarter, the recent Zacks Consensus Estimate revision trends remain positive for the upcoming period.

Over the past 30 days, 14 of the 23 analysts covering the stock have made upward revisions for the current quarter with 12 analysts raising their estimates for the third quarter of fiscal 2011. The positive trend persists for fiscal 2011 also with 24 of the 26 analysts increasing their estimates in the past 30 days. In comparison, the downward revisions have been quite less in number. While no downward revision has taken place for the current fiscal within the last 30 days, only 4 analysts have lowered their estimates for the current quarter.

Walgreen 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. At the end of the reported quarter, the company has 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.

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 taken necessary steps to meet the objective. Through the end of the first quarter, approximately 5.6 million flu shots were administered, higher than the year-ago period which was marked by the H1N1 pandemic. The company has taken necessary steps to become a prominent player in the $40 billion total immunization market. We are encouraged to note that apart from the federal government, Walgreen provides more flu shot immunizations than any other single entity in the US.

Another factor favoring Walgreen is its strong cash balance. The company exited the first quarter of fiscal 2011 with $2.1 billion of cash and cash equivalents, down from $2.6 billion at the end of November 2009. With a strong cash position, the company tries to benefit its shareholders by means of dividend payments and share repurchase programs. During the past twelve months, Walgreen has returned more than $2.6 billion in the form of dividends and share repurchases to its shareholders. 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. In the last eight years the company’s dividend has grown at a compound annual growth rate of nearly 22%. During the quarter, the company bought back $510 million worth of stock. Stock repurchases added $0.04 to the company’s earnings during the quarter. 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 fiscal 2011 and fiscal 2012 has been significant. In the past 30 days, estimates for the fiscals have been increased by 11 cents to $2.60 and 16 cents to $3.01, respectively. However, for the current quarter, estimate has gone up by a penny in the past 30 days to 78 cents.

Our Recommendation

We are encouraged by the first quarter results of Walgreen. The company has made satisfactory progress with respect to the CCR rollout and 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. Moreover, the Walgreen’s various steps to grab a share of the $40 billion immunization market are commendable. However, the current economic scenario continues to be our major concern. Additional challenge remains in the form of reimbursement issues that is impacts discretionary spending.

We are currently ‘Neutral’ on the stock which also corresponds to the Zacks #3 Rank (short term holds recommendation).

WALGREEN CO (WAG): Free Stock Analysis Report

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