Looking At the Greener Side of Walgreen

Himanshu 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) has been in the news a lot recently for a number of reasons. Though the year started on a negative note with the company losing an important contract from Express Scripts Holdings (NASDAQ: ESRX), Walgreen has managed it well and continues moving towards much better days.

The Situation…

Walgreen’s divorce with Express Scripts was a crucial one, resulting in a large number of customer traffic to shift to its rivals such as CVS Caremark (NYSE: CVS) and Rite Aid (NYSE: RAD). This helped fill the coffers of Walgreen’s rivals; for example, Rite Aid narrowed its losses to $0.05 per share this last quarter, thanks largely to the Express Scripts windfall.  The reduced customer traffic that resulted from this breakdown forced Walgreen to go through a difficult phase recently, with reduced customer traffic hampering both prescription sales and front end sales of other products.

Another impact of the deal was the shift towards generic drugs from branded ones. Since generics are less expensive than the branded ones it brings lower revenue to the drugstores. Luckily they do give higher margins than the name-brand drugs.

These factors worked together to pull down Walgreen’s fourth quarter revenue by 5% to about $17 billion. Losses from Express Scripts, coupled with weak consumer demand and a shift to generics impacted both the top line and the bottom line. However, sale of higher-margin generics widened gross margin to 28.3% from 28.2% last year.

Road Ahead Looks Much Smoother…

Thankfully, Walgreen’s won the contract with Express Scripts back in the middle of this month.  But this isn’t the only deal Walgreen has made this year; the company’s recent acquisition of Alliance Boots will help Walgreen establish a strong international footprint. The deal is expected to beget a number of benefits, one of which is cutting costs that will be a relief to the bottom line. 

Lastly, Walgreen has initiated a customer loyalty card program which will act as an incentive for customers, keeping them hooked to Walgreen’s stores. However, Walgreen’s move is not the first of its kind and has already been implemented by both Rite Aid and CVS. In fact, CVS was the first pharmacy to introduce customer loyalty program and it has been witnessing the gains of attractive rewards program from a long time now. However, gift cards coupled with loyalty card for existing customers as well as Express Scripts customers might prove to be a fruitful move for Walgreen. 

The Bottom Line

Though Walgreen has been posting lackluster quarters, things are turning to its favor. The comeback of Express Scripts, Walgreen’s expansion into new international markets and its new customer loyalty program are expected to benefit the drugstore chain immensely, enabling it to stage a rally soon. I think investors should not miss this opportunity.

justhimanshu 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.If you have questions about this post or the Fool’s blog network, click here for information.

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