Last week, Walgreen (WAG) decided to acquire the assets of 12 Eaton Apothecary pharmacies in the Boston area from D.A.W., Inc., a subsidiary of Nyer Medical Group Inc. (NYER) for approximately $19 million. The acquisition, subject to certain terms and conditions, is expected to close within the next 90 days. Following the transaction, Nyer would liquidate. We believe the acquisition will boost the company’s revenues going forward.
Walgreen’s strong balance sheet has enabled it to grow its business through acquisitions even in the midst of recession. The company generated $852 million in the fourth quarter and $4.1 billion for the year in cash flow from operations, an increase of 55% and 35%, respectively driven by strong drugstore performance, including improved working capital. At the end of the last quarter, Walgreen had $2.1 billion in cash and cash equivalents. We had expected earlier that the company would use the available funds for suitable acquisitions as well as rewarding its shareholders with generous dividend payments.
In order to make the best use of available resources, Walgreen has scaled down its plan of opening stores from the current level of 9% to 4.5%-5% in 2010 and 2.5% – 3% in fiscal 2011. This is evident from the decline in opening of new stores during the quarter. During the fourth quarter, the company opened 149 new drugstores compared with 162 in the third quarter and 199 in the year-ago quarter. We believe this decision will benefit the company as new stores take 2-3 years to become profitable.
The current economic scenario is a major challenge for Walgreen but we expect it to withstand it based on its strong cash balance and vast network of retail stores. The current U.S. government’s agenda of reforming the healthcare system will affect the company on its margin and reimbursement front. However, the inclusion of about 47 million uninsured people under the insurance net will increase the prescription volume manifold, which should help boost the top-line. We have a Neutral rating on the stock.
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