Walgreen (WAG) is scheduled to release its third quarter 2010 earnings on June 22 2010. The company is expected to earn 57 cents during the quarter, according to the Zacks Consensus Estimate.
Previous Quarter Highlights
Walgreen’s second quarter fiscal 2010 earnings of 68 cents per share missed the Zacks Consensus Estimate of 71 cents. However, the earnings were better than 65 cents reported in the comparable prior-year quarter. Results included 2 cents of restructuring cost associated with the company’s Rewiring for Growth initiative. Net sales for the quarter increased 3.1% year-over-year to $17 billion.
Agreement of Analysts
Estimate revision trends among the analysts depict a clear negative bias for the company’s earnings in the forthcoming period. Over the last 30 days, 10 and 9 analysts covering the stock have made downward revisions for the quarter ended May and August, respectively. The downward sentiment continues for the fiscal years also with estimates for fiscal 2010 and fiscal 2011 being lowered by 9 and 11 analysts, respectively.
Upward revisions have been few, with only one analyst increasing the estimates for the third quarter and fiscal 2011. Estimates for the fourth quarter and fiscal 2010 were raised by 3 and 4 analysts, respectively.
Moreover, Walgreen has witnessed lowering of estimates in the past seven days. While one analyst has lowered estimates for the next two quarters, estimates for fiscal 2010 and fiscal 2011 have been lowered by 2 and 3 analysts, respectively.
There are a number of reasons for the negative sentiment regarding Walgreen. In February 2010, Walgreen decided to acquire New York-based drugstore chain Duane Reade Holdings for a total enterprise value of $1.075 billion, including debt. Although the acquisition will expand its presence in the New York area, it will be dilutive to its earnings per share (EPS) in the first 12 months after closing and accretive in the next 12 months and thereafter. Walgreen expects to achieve synergies of $120−$130 million three years after closing the transaction.
Same-store sales came down by 0.2% during the second quarter. Front-end same-store sales also declined 1.6% due to weak demand for discretionary goods and lower-than-anticipated sales of flu-related products.
Moreover, recently Walgreen decided to terminate its relationship with CVS Caremark Corp. (CVS) citing certain disagreements. No doubt, severing ties with CVS will hamper revenues of the company.
Magnitude of Estimate Revisions
The magnitude of revisions is moderate following the second quarter results. Overall, estimates for the third quarter have gone down from 60 cents to the current level of 57 cents per share in the last 90 days. For fiscal 2010, estimates have slipped from $2.28 to the current level of $2.21 per share over the past 3 months. A similar trend can be seen for 2011, with estimates going down by 7 cents to $2.61 in the last 90 days.
Surprise
Going by past trends, we expect Walgreen to exceed estimates. Although the company missed expectations in the previous quarter it has a positive four-quarter average of 2.89%. This means that on an average, Walgreen has topped the Zacks Consensus Estimate by 2.89% over the last four quarters.
Our Recommendation
Walgreen has a very strong balance sheet which augurs well for further acquisitions. In addition the company follows a policy of rewarding its shareholders through regular dividend payments and share repurchase programs.
We currently have a Neutral recommendation on the stock.
Read the full analyst report on “WAG”
Read the full analyst report on “CVS”
Zacks Investment Research
