Walgreen Co. (WAG) reported second quarter fiscal 2010 earnings of 68 cents per share, which missed the Zacks Consensus Estimate of 71 cents. However, the earnings were better than 65 cents reported in the comparable prior-year quarter. Results include 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 although same-store sales (those open for more than a year) came down by 0.2%. 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.
Gross margin for the quarter at 28.8% increased by 50 bps compared to the corresponding period last year primarily on account of lower LIFO provision and lower restructuring expenses while retail pharmacy margins were flat.
Walgreens generated $595 million for the quarter in cash flow from operations. At the end of the second quarter, the company had $2.5 billion in cash and cash equivalents.
Walgreens uses its strong cash balance for suitable acquisitions. Recently, the company decided to acquire New York-based drugstore chain Duane Reade Holdings for a total enterprise value of $1.075 billion, including debt.
In order to make the best use of available funds, Walgreens has scaled down its plan of opening stores until 2011. It expects a 4.5-5% organic store growth in fiscal 2010 and 2.5-3% in 2011. This is evident from the decline in the opening of new stores during the quarter. During the second quarter, the company opened 41 new drugstores compared with 57 in the year-ago quarter.
We believe this decision will benefit the company as new stores take 2-3 years to break even. As of Feb 28, the company operated 7680 stores in 50 states, the District of Columbia, Puerto Rico and Guam.
In order to enhance customer experience, Walgreens has adopted a strategy of customer-centric retailing (CCR). This refers to enhancing store formats, pricing, promotions,and vendor relationships to provide a better experience for the customer. The company rolled out the format in 700 locations during the quarter. Additional stores will roll out in fiscal 2010.
We are pleased to note that Walgreens increased its retail pharmacy market share by 60 bps to 18.9% during the quarter. We currently have a Neutral recommendation on the stock.
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