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Walgreen Earnings Down, But Prospects Still Up

Posted: Jun 26, 2009 10:44 AM by Greg Sushinsky

Tickers in this Article: WAG, CVS, RAD, COST, NPD

Walgreen (NYSE:WAG) had a slight drop in profits in its recent earnings report, putting a small dent in its otherwise slow-but-steady growth through this recession. The company continues to implement strategic changes in order to resume earnings growth as the economy heads toward recovery, if not sooner. Let's take a look at the direction Walgreen is heading and the likelihood of success.

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Compounding Factors
Walgreen reported quarterly earnings per share (EPS) of 53 cents versus 58 cents in the same quarter last year, as the drugstore chain was hit by cautious consumer spending in the midst of the company's retooling of its stores. Walgreen is also cost-cutting and revamping its product line, honing in on fewer products while attempting to compete with other value-oriented stores. Sales rose 8% to $16.2 billion, with same-store sales up 2% and prescription sales up 3.8%. The company expects the cost-cutting to pay off in 2010, while analysts' estimate that earnings will grow again next year. (What people buy and where they shop can provide valuable information about the economy, read Using Consumer Spending As A Market Indicator.)

Major Competitors
CVS Caremark (NYSE:CVS) and Rite Aid (NYSE:RAD) are the other giant chains in the drugstore space, and although they are subject to the same economic conditions and shifting consumer responses, both are faring quite differently from each other. CVS has posted improved earnings despite the economy, and continues to have a good-looking earnings trajectory projected for the next couple of years, an impressive performance through this major recession. Since 2007 CVS has owned Caremark, the Pharmacy Benefit Manager company, which has added a powerful boost to its business. Rite Aid, on the other hand, reported its eighth straight losing quarter and is looking at continuing tough times. Rite Aid has been fighting to digest its own acquisition and is still saddled with too much debt, and was cited as a weak retailer that may not make it through this recession.

Some Other Drug Retailers
Competition in the drugstore area is fierce, as non-drugstores, such as large discounters, are also in the pharmacy business. Costco Wholesale (Nasdaq:COST), a major discounter, has a large pharmacy business along with its other wide array of no-frills items ranging from tuna fish to gasoline. However, Costco has also facing pressure in this economy. Discount and drug retailing are under pressure worldwide, as even the western-style drugstore chain China Nepstar Chain Drugstore (NYSE:NPD) has, like its American counterparts, been changing and re-adjusting its store mix and retailing approach as the Chinese economy has sailed into strong headwinds.

The Bottom Line
Drugs and foods, two recession staples which were once a sure thing during bad economic times, have become much more challenging industries. Still, the enduring strength of the pharmacy business, along with the aging population, continues to add to the base pool of customers, and these are long-term factors Walgreen exploits well. The altering of its overall retailing approach should help Walgreen to compete with the other large retail discounters and, along with the streamlining of its operations, should bode well for Walgreen in the near- and long-term future. The company is also building a tremendous cash position, and although the stock had a 27% run up earlier this year, its recent pull back might present a buying opportunity. (To analyze retail stocks, investors need to be aware of the most common metrics used, see Analyzing Retail Stocks.)

By Greg Sushinsky

Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.

Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinky's literary work, see http://writing.gregsushinsky.com/.

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