What's Ailing Walgreen

Diane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Walgreen (NYSE: WAG) recently reported disappointing first quarter results for fiscal 2013. The Deerfield, Illinois-based company revealed that profits for the quarter slipped to $413 million, or 43 cents a share, compared to the 63 cents earned in the same quarter a year ago.

After the dismal report, JP Morgan reiterated a “neutral” (or what savvy market participants like to call a seven letter word for "sell") position on the popular drug store chain, highlighting the rocky road to recovery that Walgreen faces.

What’s ailing Walgreen, you ask? It’s not one thing in particular; it’s actually a noxious cocktail of things.

First off, Walgreen lost a cache of customers following a highly publicized contract dispute with the country’s largest pharmacy benefits manager Express Scripts (NASDAQ: ESRX). The onerous row began in June 2011 over payment issues between the drug store chain and the pharmacy benefit manager, which ended a once healthy relationship and left scores of Americans with Express Scripts drug plans in need of a new pharmacy.

Many, including myself, went to rivals like CVS (NYSE: CVS) or Rite Aid (NYSE: RAD), where we were warmly welcomed. On a recent visit to my closest CVS, located right across the street from Walgreen, CVS' parking lot was nearly full while the lot at Walgreen looked dismally empty.

The Walgreen defections are a welcome coup for both aforementioned pharmacy retailers.

Rite Aid just reported its first quarterly profit since 2007, thanks to the additional traffic from former Walgreen customers. Plus, it is optimistic about its future. The Camp Hill-based company’s revenues languished over the last few years due to the increase in sales for generic drugs, which cost less than their brand-name counterparts, such as Pfizer’s cholesterol fighting drug Lipitor, the best selling drug in the world, now available in generic form. But, Rite Aid's customer base grew following the Walgreen/Express Script debacle. The company has also closed under performing stores, redecorated others, and is buoyant about a real turn-around.

CVS also predicts a hale and hearty year ahead.

I was a displaced Walgreen pharmacy customer who took my business to CVS. After just one visit, it was like I was a long-time regular customer; genuinely questioned how I was feeling and addressed by my first name (I hate it when people call me ma’am). Plus, I eagerly signed up for CVS’ “ExtraCare Card,” which allows me to earn 2% back on my purchases, in addition to scores of special deals.  Yes, I do feel kind of special to CVS, an emotion never stirred in all my years shopping at Walgreen’s.

Also weighing on Walgreen is the $6.7 billion investment in the European pharmacy chain Alliance Boots. The venture gave Walgreen a 45% stake in the growing global pharmacy retailer with the option to buy the remaining 55% for some $9.5 billion in cash and stock in about three year’s time --  plenty of time to see how the integration is going. The investment was a drag on Walgreen’s Q1 earnings. Among the challenges of meshing the two companies that are oceans apart are operational differences, as well as the blending of national and store brands.

Walgreen is pulling out all the stops in its attempts to woo back customers with a deluge of direct mail, as well as in-store and online coupons. In addition, the drug store chain has implemented a new marketing blitz it hopes will be just the shot in the arm it has been aching for.

As for CVS, it recently reported upbeat expectations for next year. The company anticipates earnings for 2013 to come in around $3.84-$3.98 per share, a target that is in excess of Wall Street’s mean robust forecasts of $3.82 per share.  Furthermore, the company boosted its dividend a healthy and hefty 38% to 22.5 cents a share, payable to shareholders in the first quarter of 2013.

The retail drug and pharmacy chain is also expanding. Of late, it took an 80% stake in Brazilian retail pharmacy chain Onofore for $313 million. The pact augments its presence in the rapidly growing South America region.

Bank of America likes the vigorous outlook for CVS, and maintained their "buy” rating on shares.

CVS may be a fruitful prescription to under the weather portfolios in the economically challenged months ahead as we deal with tax hikes and spending cuts, otherwise known as the fiscal cliff. Consumers will cut back on discretionary items as their wallets get pinched. But they are still going to buy toothpaste, soap, vitamins, shampoo, and lotion, and they are going to be looking for bargains and shopping where they feel valued.

Yes, CVS just might be what the doctor ordered.

DianeAlter has no positions in the stocks mentioned above. The Motley Fool owns shares of Express Scripts. Motley Fool newsletter services recommend Express Scripts. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus