Walgreens (WAG) began fiscal 2010 with a strong first quarter. Walgreens reported earnings of 52 cents per share, which were slightly above the Zacks Consensus Estimate of 48 cents and 41 cents in the comparable prior-year quarter. Net sales for the quarter increased 9.5% year-over-year to $16.4 billion driven by 4.9% same store sales (those open for more than a year) growth. Front-end same store sales increased 2.7% while prescription same store sales increased 6.1% in the quarter.
Gross margin for the quarter at 27.6% declined by 10 bps compared to the corresponding period last year primarily on account of non-retail businesses, front-end product mix and restructuring costs.
Walgreens generated $1.2 billion for the quarter in cash flow from operations, an increase of about 275% driven by strong drugstore performance and improved working capital. At the end of the first quarter, Walgreens had $2.5 billion in cash and cash equivalents.
Walgreens uses the strong cash balance for suitable acquisitions as well as rewarding its shareholders with generous dividend payments and share repurchases. As a part of Walgreens’ $2 billion stock repurchase program announced in October, the company bought back shares worth $150 million during the quarter.
In order to make best use of the available funds, Walgreens has scaled down its plan of opening stores till 2011. This is evident from the decline in the opening of new stores during the quarter. During the first quarter, the company opened 172 new drugstores compared with 212 in the year-ago quarter. We believe this decision will benefit the company as new stores take 2-3 years to become profitable. As of Nov 30, the company operates 7649 stores in 50 states, the District of Columbia and Puerto Rico.
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. Based on positive results from its initial 35 CCR test stores, Walgreens rolled out the format in 400 stores in Texas during the quarter. About 3000 additional stores will roll out in fiscal 2010.
We are pleased to note that Walgreens increased its market share from 13% in 2003 to 18.5% of all retail prescriptions currently. The company re-affirmed that it is on track to save $1 billion in pre-tax cost savings over a period of three years till 2011.
We believe the performance of the company is quite commendable especially in the current economic scenario where there are many headwinds including increased competition. Additionally, any changes to government regulation in an effort to curb rising health-care costs by reducing prescription drug costs and pharmacy reimbursement rates could severely impact the company’s business. We have a Neutral recommendation on the stock.
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