Walgreen (WAG) traded lower after they reported fiscal third-quarter earnings that fell shy of estimates as falling margins offset growth in revenue and prescription sales – both of which topped expectations.
Walgreen’s total revenues increased 8% despite a weaker consumer, with the company emphasizing staples like groceries and pushing its own private-label brands. CEO Gregory Wasson said the company has seen a double-digit increase in sales of its private-label brands.
Gross margin slid to 27.5% from 28.3% on results of nonretail operations and added inventory costs. Helping overall margins were an increase in pharmacy margins as a result of the impact of generic drug sales.
Prescription sales jumped 8.2% and climbed 3.8% on a same-store (stores open for at least one year) basis. The company exceeded by 5.7 percentage points the industry-wide growth rate, excluding Walgreens, as reported by IMS. The company’s promotion of discount drug programs has helped reduce prices and led to greater use of generic drugs – which carry higher profit margins than brand name drugs.
Today’s earnings call featured detailed updates of the company’s growth initiatives – Customer Centric Retailing (CCR) and the Rewiring for Growth. Walgreen – that redirected Walgreen’s focus from rapid expansion to improving returns and in-store execution. As I said back in November of 2008, these initiatives make me very excited about Walgreen’s long-term growth prospects, and the execution to this point has been impressive.
CCR gives more attention to merchandising and customer experience, Walgreen hopes to get customers to add one more item to their basket per visit. Walgreen plans on retrofitting about 400 stores by fall, with a nationwide rollout expected throughout 2010. Cost savings from the Rewiring for Growth initiative are expected to reach $1 billion annually beginning in 2011 – although the initiative will result in net costs in 2009.
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Peter J. Lazaroff
Monday, June 22, 2009
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Good write up, Peter! I also like the direction that WAG is taking in existing stores with Rewiring for Growth and inventory management in responding to what customer wants with CCR initiatives. This sort of "diet" would hopefully put them in better shape when they come out of this cycle, and longer term better manage their margin. Bumpy road might await as these gets implemented, but as you mention, they are delivering it pretty impressively so far. Their prescription sales exceeding 5.7% more than industry growth rate is particularly notable!
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