On June 22, Walgreen (WAG) reported third quarter fiscal 2010 earnings per share (EPS) of 47 cents, which missed the Zacks Consensus Estimate of 57 cents and the year-ago quarter’s 53 cents. However, results include 1 cent towards restructuring cost, 2 cents for the Duane Reade acquisition and 4 cents for the elimination of tax benefits for the Medicare Part D subsidy for retirees.
Net sales for the quarter increased 6.1% year over year to $17.2 billion with same-store sales (those open for more than a year) increasing by 0.7%. Front-end same-store sales increased 0.1% and were affected by weak demand for discretionary goods and lower-than-anticipated sales of flu-related products.
For a full coverage on third quarter earnings, read: Walgreen Misses Estimates
Agreement of Analysts
Following the release of third quarter results, estimate revision trends among analysts depict a clear negative outlook for the upcoming quarters. Over the last 7 days, 10 of the 21 analysts covering the stock have made downward revisions for the fourth quarter fiscal 2010. A similar downward trend is witnessed for fiscal 2010, first quarter fiscal 2011 and fiscal 2011 with estimates being lowered by 9, 4 and 11 analysts, respectively. Although no upward revision in estimates was made for the next two quarters, estimates for fiscal 2010 and fiscal 2011 have been raised by one analyst.
The negative bias was noticed in the past as well. Over the last 30 days, estimates for Walgreen have been lowered by many analysts. The upward revision has been comparatively less.
There are a number of reasons for the negative sentiment regarding Walgreen.
Walgreen’s earnings were disappointing as it has been witnessing several headwinds. While same-store sales increased by a mere 0.7%, front-end same-store sales increased 0.1%. Sales were affected by a weak economy, which continued to hamper demand for discretionary goods. Moreover, lower-than-anticipated sales of flu-related products also hampered same store sales.
Walgreen also faced pressure due to prescription reimbursement issues and a slower rate of introduction of new generic products during the quarter.
These issues are likely to continue in the next few quarters as well, which has led the analysts to lower their estimates. However, we also note that the situation on the generic front is likely to improve by the end of 2011, when a number of generics are likely to be introduced, which should boost the fortunes of the company.
Although Walgreen recorded a 6.1% increase in sales, its operating income came down by 2% due to an 8.5% increase in selling, general and administrative (SG&A) expenses. As a percentage of sales, SG&A expenses increased to 22.8% during the quarter from 22.3% in the third quarter of 2009. An increase in salary related expenses, occupancy costs and new stores on the East and West coast led to the increase in SG&A expenses.
Magnitude of Estimate Revisions
The magnitude of estimate revisions for Walgreen has been quite significant over the last 7 days. Subsequent to the release of third quarter results, estimates for the next two quarters have been lowered by two cents (46 cents) and a penny (54 cents), respectively. Moreover, estimates for Walgreen’s fiscal 2010 and fiscal 2011 earnings have decreased by 3 cents ($2.18) and 7 cents ($2.54), respectively.
Our Recommendation
Although Walgreen’s quarterly results were below expectations, the company is adopting several other strategies for long-term benefits. Moreover, we are pleased to note that the integration process of Duane Read Stores is on track. Besides, the company’s restructuring initiatives should enable it to save funds when implemented.
We have a Neutral recommendation on Walgreen given the strong potential of the company in the long term.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
Read the full analyst report on “WAG”
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