Is This Drugstore Chain Worth Owning?

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

The first quarter (for the fiscal year) earnings reports of Walgreen (NYSE: WAG) were recently released and presented a contraction in the company's revenues and profitability. Despite the little growth the company has shown during the year, shares of the largest drugstore chain in the U.S have increased by nearly 12%. Let's examine the recent financial reports of the company and try and figure what's next for this company.

Sales Continue to Dwindle

According to the recent earnings report, Walgreen’s revenues decreased by 4.6% compared to the same quarter in the previous year. Moreover, the company's operating earnings tumbled down by 21.7% in the first quarter of 2013 compared to Q1 2012. The company's Prescription sales fell by 7.2% compared to the parallel quarter. Part of the drop in Prescription sales was related to the company's dispute with Express Scripts (NASDAQ: ESRX) from earlier this year. Some estimate it cost nearly $4 billion to Walgreen's yearly revenues. This comes to nearly 6% of its total annual revenues. The settlement reached between Walgreen and Express Scripts back in September, in which customers of Express Scripts were allowed to return to Walgreen's drugstores, is likely to slowly help rally Walgreen's revenues in the months to follow.

On a national level there is little growth in retail sales. According to the latest retail sales report, total retail sales edged up by 0.3% in November. During the first eleven months of the year total sales rose by 5.5%. In particular, the report also reveals the total sales in Health and Personal Care Stores rose by only 1.2% during the first eleven months of 2012 compared to the same period in 2011. Moreover, this sector increased by 0.6% during November compared to October and edged up by 0.1% compared to November 2011. These figures suggest the Health and Personal Care sector in the U.S remained nearly unchanged during 2012 as sales only slightly increased.  This means, not only Walgreen’s is struggling to show growth in sales, but also the entire industry isn't expanding.  

If the company's sales will continue this downward trend it could further pull down the quarterly financial report of the company will present additional fall in revenues.

So the industry isn't doing well. How is Walgreen's doing compared to its comparators?

The company's operating profitability is very similar to other leading drugstores such as CVS (NYSE: CVS). The chart below presents the operating profitability of Walgreen, CVS and Rite Aid (NYSE: RAD) in recent quarters.

<img src="/media/images/user_12845/walgreen-and-operating-profitablity-2012-jan_large.jpg" />

As seen, the operating profitability of the Walgreen dwindled to 4.1% as of the first quarterly report of 2013 (fiscal year) compared with 5% in the parallel quarter in the previous year.

The company's financial risk is also on the level compared to its competitors. The chart below presents the debt-to-equity ratio for Walgreen and CVS as of the recent financial quarterly report. As seen, the debt-to-equity ratio of Walgreen is very similar to CVS.

<img src="/media/images/user_12845/debt-to-equity-ratio-walgreen_large.jpg" />


The Foolish Bottom Line

The rise in Walgreen's stock during 2012 is a testament to the vote of confidence its investors have for this drugstore chain. The company's lack of growth in revenues during the year was partly due to its dispute with Express Scripts. The slow growth in the health care industry also didn't help rally the company's sales.  I think the company’s revenues and earnings will slowly recover in the months to follow but unless the entire Health Care industry will start to pick up, the company won't be able to show much growth in sales.

For further Reading: 

Will Exxon Continue To Trade Up?

QE3 Is Here, So Why Isn’t Gold Pulling Up?

Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.

liorc 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