Drilling Down Into The Quarter
The company reported 45 cents per share in earnings and sales of $14.6 billion in the quarter. Total comparable store sales were up 2.6% for the fourth fiscal quarter.
Walgreen's makes the majority of its revenue from sales of prescription drugs (66% in the recent quarter), so it is important to look at this category to analyze the company's earnings release. The company reports this category in three ways: the raw prescription revenue, the prescription revenue on a comparable stores basis and the number of prescriptions filled on a comparable stores basis. The two latter measures are more useful as they adjust for the number of new store openings, and calendar shifts.
Total prescription sales rose 7.9% in the fourth fiscal quarter. On a comparable stores basis, prescription sales rose 2.8%, and the number of prescriptions filled increased 0.6%.
This was a closely monitored metric for investors as a recent report by IMS Health showed that sales of prescription drugs through retail pharmacies slowed to a 1% growth rate through July 2008. Growth in 2007 was 3.8%, according to IMS Health. Prescriptions filled showed a negative growth trend in another report, according to IMS Health, which fell 0.5% in the first quarter and 1.97% in the second quarter over the same periods of 2007. Last week Rite Aid (NYSE:RAD) reported that prescriptions filled decreased 1.7% on a same store sales basis.
Promotions Don't Pay
Expense control was good for the company in the quarter as well. Selling, general and administrative expenses were 22.8% of sales, but benefited from a "positive adjustment of $79 million, which corrected for historically over-accruing the company's vacation liability". Even without the adjustment, SGA grew at a slower rate than sales.
Walgreen's also indicated that it had increased promotional activity in the quarter, and that it failed to produce the results the company wanted. "Going forward, we plan to moderate our promotional activity while focusing on the value of our convenience and services," said Walgreen President Greg Wasson. "In reaction to the economy, we invested more than originally planned in promotional and pricing programs in the fourth quarter. While their high value attracted customers, they did not produce the incremental sales we'd hoped for."
On The Prowl
Walgreen's has taken part in the recent takeover activity in the industry. On September 12, 2008, Walgreen made a $75 a share bid for competitor Longs Drug Stores (NYSE:LDG), beating a $71.50 offer made by CVS Caremark (NYSE:CVS) in August 2008. The original offer for Longs Drug Stores was scorned by major shareholders as undervaluing the company. If Walgreen's wins the battle for Longs Drug Stores, and management is right about the undervalued real estate, it would add to the value of the shares. (To learn more, check out Trademarks Of A Takeover Target.)
Bottom Line
Walgreen's sales and earnings growth, while below that of previous years, is a stand out in the current market, particularly for retailers. It's clear that Walgreen provides a safe haven in the bear market.
