Posted on Tuesday, 22nd December 2009 by admin
Walgreen (WAG), a drugstore chain that competes with CVS Caremark (CVS) and Rite Aid (RAD), issued fiscal Q1 numbers on Monday. The growth rates were impressive.
Total sales were up 9.5%. Net income increased almost 20% to 49 cents per diluted share. Operational cash flow was higher by over three times. According to our earnings preview, analysts were expecting 48 cents per share. Of course, since there were restructuring charges included in the above per-share profit stat (equal to 3 cents per share), the beat is better than it looks. This was indeed a good quarter.
Same-store sales increased 4.9%. Front-end comparable sales increased 2.7%. With a drugstore chain, the latter metric is particularly important since it measures non-pharmacy transactions. We know that everyone needs prescriptions, but they have choices, obviously. They can go to other drugstores; they can even go to Wal-Mart (WMT). What plays a role in the decision process? If you give the consumer a great, interesting shopping environment to browse through once the prescription is filled, then the consumer may choose to remain loyal to your pharmacy and buy other margin-friendly stuff. I therefore would like to see Walgreen get that front-end figure a little higher in coming months.
Which might be difficult. Driving business right now is the H1N1 situation. When that fades away, will Walgreen be able to keep the attractive growth rates?
Walgreen’s management better be on top of things. It has to ensure that it is taking full advantage of the current traffic trends so that it can capture a significant amount of repeat business to the brand.
On a valuation and trademark basis, I prefer CVS Caremark over Walgreen. It will be interesting to see, however, how these two companies fare in the upcoming non-flu quarters, and what kind of disparity between them shapes up in terms of competitive advantage and customer retention.
Disclosure: I don’t own any company mentioned; positions can change without notice.
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Tags: Growth, Growth Q1
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