5 Takeaways From Walgreen’s Last Earnings Call
William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
1. Express Scripts’ (NASDAQ: ESRX) impact – Walgreen still feels the effects from its 2011 fallout with Express Scripts. Walgreen’s revenue and profitability clocked at $17.3 billion and $413 million respectively for the quarter. These equate to a 5% and 26% respective drop versus the same quarter last year.
Since Walgreen and Express Scripts buried the hatchet customers are slowly making their return. Comparable prescriptions increased 320 basis points since the previous quarter according to the earnings call. However, some permanent loss will ensue. Rival CVS (NYSE: CVS) estimates it will retain 60% of the customers gained from the Walgreen Express Scripts fallout. In short, people possess long memories of bad experiences.
2. Alliance Boots performance – In June 2012, Walgreen expanded into international territory by purchasing a stake in Alliance Boots. Complexities regarding international audit and regulatory issues muddy the waters regarding the reporting of Alliance Boots performance. Walgreen started reporting Alliance’s numbers on a 1 quarter lag instead of a 1 month lag. As a result, this created a $0.07 per share adjustment in Walgreen’s adjusted earnings per share. In any event, this will make it hard to decipher the performance of the Alliance Boots investment.
Moreover, Walgreen’s executives feel the Alliance Boots partnership will produce cost savings for both companies. The partners committed six teams of employees to look for revenue and cost reduction opportunities. Also, Walgreen could leverage overseas relationships to block new American entrants such as CVS, from international territory. Indeed, Alliance Boots could prove beneficial to Walgreen’s bottom line regardless of the reporting complexities
3. Beyond traditional pharmacy – A strategic shift beyond traditional pharmacy retailing permeates the industry. CVS’s 2006 acquisition of pharmacy benefit manager Caremark serves as the most famous example. This merger gave CVS the massive scale it needed for market leadership. As a result, competitors responded with acquisitions of their own.
Walgreen, in an effort to build scale, acquired a number of companies in 2012 some of which don’t directly relate to the traditional retail pharmacy. In Walgreen’s last earnings call, company executives discussed acquisitions of companies such as BioScrip, a provider of home health care and pharmaceuticals, and drugstore.com.
4. Balance rewards – Last fall Walgreen, in a reactionary effort, introduced its Balance Rewards program. CVS and Rite Aid already had a customer loyalty program. Nonetheless, Walgreen executives expressed enthusiasm with 45 million sign ups. This could help repair some of the damage caused by the Express Scripts fiasco. Walgreen, however, arrived a little late to the game.
5. Private Brands – Typically a retailer wants to see an improvement in sales of its private labels. Private labels typically command a higher margin. Walgreen saw a 200 basis point increase in private brand penetration.
To sum it up, Walgreen’s stock price will suffer long term. The soured relationship with Express Scripts will continue to drag on top and bottom line results. As noted above people harbor long memories from bad experiences. They value stability. The complex accounting issues surrounding the Alliance Boots investment will leave investors scratching their heads. While Walgreen looks ahead with acquisitions, its strategy seems eclectic. It’s buying everything from international health and beauty companies such as Alliance Boots to domestic health care companies such as BioScrip. The reactionary effort to introduce a balance rewards program tells me Walgreen is slow on the uptake. However, increased private brand penetration simply won’t move the needle on overall profitability. Investors need to stay away from this company.
stockdissector 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!