Walgreen Up 8% YTD: But is the Sales Bounce Already Priced In?

This year’s particularly nasty strain of flu has claimed lives across the country, the worst outbreak of its kind in about a decade, the Center for Disease Control has told us. But it had to be good news for someone out there, and one of the handful of beneficiaries is drugstore chain Walgreen (WAG).

WAG Chart

WAG data by YCharts

As a result, Walgreen reported a 6.3% jump in sales for the month of January earlier this week, while same-store sales growth (for those stores open 12 months or more) climbed 3.7% -- figures that were nearly double estimates by many analysts. That’s the first positive growth in same-store sales that Walgreen has reported since last February, and the biggest such jump in nearly 18 months.

The good news was definitely a function of what was going on at the back of the stores, where the pharmacies are located. The number of prescriptions filled soared by 13.6%, and pharmacy-specific same-store sales climbed by 6.2%, while the same-store sales of the kinds of items shoppers pay for at the front cashiers – greeting cards, toilet paper and soft drinks – increased 1.3% in total but only an anemic 0.4% on a same-store sales basis. While that is disappointing, it’s not all that gloomy, especially in hints that Walgreen may finally be shaking off the impact of the nasty dispute surrounding Express Scripts (ESRX) that ended last summer. If that is indeed the case, it means that those consumers filling prescriptions at Walgreen stores in January will bring their regular prescriptions into the store – and probably stick around to pick up other items at the same time.

WAG EPS Basic Quarterly YoY Growth Chart

WAG EPS Basic Quarterly YoY Growth data by YCharts

Walgreen won’t report its next earnings (for the fiscal second quarter) until late March, but signs are already in that stronger sales will result in a boost to the company’s bottom line, helping to extend the reversal to the recent declines in profitability. Analysts are projecting that it will generate earnings per share of 94 cents, up from 78 cents a share in the year-earlier period. That’s a penny higher than analysts were looking for a month ago. Meanwhile, CVS Caremark (CVS) reported not only an increase in profits for its fourth quarter, but also boosted its outlook.

The key question surrounding Walgreen’s future prospects revolves around the question of how many of those consumers filling prescriptions in January are those who are returning to the drug store chain now that its dispute with Express Scripts has been resolved. The two companies had been fighting over payment terms for more than a year, and customers of the prescription benefits manager were caught in the middle. Early last year, Express Scripts required customers to pay more for their medications if they bought them at Walgreen, or to shift those prescriptions to another chain. Analysts calculate the dispute cost Walgreen some $4 billion in revenue. The dispute was resolved late last summer, but it takes time for those consumers with regular prescriptions to shift back – if they choose – to Walgreen. Suggesting that this is what is taking place, Rite-Aid (RAD), to which those consumers had migrated during the dispute, reported that pharmacy same-store sales dipped 1.4% during January.

WAG Forward PEG Ratio Chart

WAG Forward PEG Ratio data by YCharts

The question now is whether the growth in Walgreen’s share price (it is up 8.75% so far this year alone) has outstripped the prospective growth in its fundamentals. Walgreen's PE ratio has moved from a recent low of about 10 to 18 currently, and that has pushed the dividend yield down to about 2.7%. Analysts are becoming a little more wary; while overall they recommend maintaining an overweight position (the dividend yield is still a healthy 2.65%), but the fundamentals suggest that this may be a stock to buy on dips or any future disappointment on same-store sales news in the future.

Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at editor@ycharts.com.



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