We are pleased with Walgreens’ (WAG) fourth quarter earnings of 40 cents per share, which were slightly above the Zacks Consensus Estimate of 39 cents and similar to the comparable prior-year quarter.
Apart from the quarterly earnings, Walgreens’ announced net earnings per share for the fiscal year of 2009 as well, which were $2.02 compared to $2.17 in the previous year. Net sales for the quarter increased 7.6% year-over-year to $15.7 billion, driven by 2.4% same-store sales (those open for more than a year) growth.
Front-end same store sales declined 1.4% while prescription same store sales increased 4.5% in the quarter. For the full year, sales increased 7.3% to 63.3 billion.
Gross margin for the quarter at 27.7% increased by 10 bps compared to the corresponding period last year, primarily on account of an increase in retail pharmacy margins as a result of the impact of generic drug sales, offset in part by non-retail businesses, front-end product mix, restructuring costs.
Walgreens generated $852 million for the 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 fourth quarter, Walgreens had $2.1 billion in cash and cash equivalents. We believe the strong cash balance can be used by the company for suitable acquisitions as well as rewarding its shareholders with generous dividend payments.
In order to make best use of the available funds, Walgreens 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. As of Aug. 31, the company operated 6997 stores in 50 states, the District of Columbia and Puerto Rico versus 6443 a year ago.
Based on positive results from its 35 CCR test stores, Walgreens now plans to roll out the format in 400 stores in Texas by year’s end. Additional stores will be rolled-out in 2010. The company re-affirmed that it is on track to save $1 billion in pre-tax cost savings over a period of three years until 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 healthcare costs by reducing prescription drug costs and pharmacy reimbursement rates could severely impact the company’s business. The stock is up more than 9% following the release of better-than-expected fiscal 2009 results. We have a Neutral recommendation on the stock.
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