(WAG) Walgreen Third Quarter 2011 Earnings Preview

Walgreen Co. (WAG) is scheduled to release its third quarter 2011 earnings on Tuesday, June 22, 2011, before the market opens.

The Zacks Consensus Estimate for the third quarter is pegged at 62 cents per share.

The company has already reported total sales of $18.38 billion in the third quarter, up 6.8% from $17.20 billion in the year-ago period. Comparable store sales (those open for more than a year) increased 4.1% during the quarter, while front-end comparable store sales also spiked 3.9%, with prescriptions filled at comparable stores increasing by 4.2%.

Previous Quarter Highlights

Walgreen reported EPS of 80 cents in the fiscal second quarter, in line with the Zacks Consensus Estimate but higher than the year-ago earnings of 68 cents. The prior year’s EPS included restructuring cost and integration costs of a penny each associated with the Duane Reade acquisition.

Net sales for the quarter increased 8.9% year over year to $18.5 billion. While comparable store sales during the quarter increased 4.1%, front-end comparable drugstore sales jumped 4.3%. Prescription sales, accounting for 62.6% of sales in the quarter, leaped 7.7%, while prescription sales in comparable stores increased by 3.9%. Moreover, the company also raised its retail pharmacy market share to 20.1%.

Agreement of analysts

Estimate revision trends among analysts depict a positive bias for the company’s earnings in the third quarter. Over the last 30 days, out of the 20 analysts covering the stock, estimates have been raised by 4 analysts with none moving in the opposite direction.

However, estimate revisions for fiscal 2011 reflect a negative bias. Over the last 30 days, out of the 8 analysts covering the stock, 3 have downgraded estimates for the quarter while none raised their estimates.

Earlier this month, Walgreen completed the divestment of its pharmacy benefit management (PBM) business to Catalyst Health Solutions (CHSI) for $525 million in cash. Subsequent to this deal, Walgreen will be able to better focus on its 7,700 drug stores.

We are also awaiting more update regarding sales trends, Walgreen’s Customer-Centric Retailing (CCR) initiative and the progress on the Rewiring initiative. At the end of the second quarter, the company converted 1,873 stores and opened 450 new stores with the CCR format.

Walgreen expects to convert 3,200 stores and open approximately 100 new stores with the CCR format by the end of 2011. For the remaining remodels, the company expects to incur costs of approximately $45,000 per store.

Moreover, in order to accelerate its Infusion Pharmacy business, Walgreen decided to limit its presence in the respiratory therapy durable medical equipment (RTDME). In December, the company started the process of selling facilities and currently has sold RTDME operations in six states.

In June 2011, Walgreen completed the acquisition of online retailer drugstore.com for a total enterprise value of $409 million. Walgreen plans to reinvest in this business and expects the transaction to be dilutive by 3 cents per share to fourth quarter of fiscal 2011 earnings.

Surprise

Analyzing past trends, Walgreen has exceeded estimates in two of the last four quarters and missed in one. However, the company has an average surprise of 2.88% over the trailing four quarters.

Our Recommendation

We are encouraged by Walgreen’s strategic decisions, including the sale of the PBM business and the acquisition of drugstore.com. Moreover, the company has made satisfactory progress with respect to the CCR rollout and meeting the targeted savings under the rewiring initiative. The benefits from these initiatives will be experienced over a period of time.

In order to make the best use of available funds, Walgreen has scaled down its stores opening target. We believe this decision will benefit the company as the new stores take 2 to 3 years to break even. Leveraging on its strong cash balance, the company is well equipped to pursue suitable acquisitions in future.

However, Walgreen has been impacted by high unemployment levels and lower discretionary spending in the past few quarters.

CATALYST HEALTH (CHSI): Free Stock Analysis Report

WALGREEN CO (WAG): Free Stock Analysis Report

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