Drugstores Fight Retail Heartburn

Many US retailers are facing a bleak holiday selling season. Coming off already slow sales, earnings expectations are being lowered left and right. At least one retail segment, however, seems to be bucking the retail tide, and even showed some small growth in same store sales in the most recent quarter. That group is retail pharmacy chains.

Walgreen (NYSE: WAG) reported a 2% increase in same store sales for October in its 7000 plus stores. The company, like the other pharmacies that will be mentioned here, sells not only pharmaceutical products, but also a variety of discount items ranging from holiday decorations to toys and candy. Walgreen, however, ranked third of the big three pharmacy chains. During the September/October period, Walgreen stock plummeted more than $10/ share, but has been relatively even-keeled since then, mostly trading in the $22-$25/ share range. Walgreen offers a dividend yield of 1.9% at its current price.

Rite-Aid (NYSE:RAD) was second with a same store sales growth of 2.9% in October. However, The Motley Fool cautions that Rite-Aid’s overall financial picture is weak. The company carries a heavy debt load which is an uncomfortable position to be in. Rite-Aid stock ended the week at just $0.31/ share down from a 52 week high of $4.72. Even though same store sales grew during October, the company’s most recent full quarter report showed them operating at a loss. Rite-Aid is clearly the weakest of the three chains. If fourth quarter sales falter for Rite-Aid, we may see some of their lenders start to lose patience.

The CVS/pharmacy (NYSE: CVS) saw a gain of 3.7% in same store sales for the entire third quarter. That’s a fairly impressive number for this economy. Even so, the company’s share price has tumbled from its 52 week high of over $44/ share in June to close the week at just $26.39. CVS is the largest of the three drugstore chains and offers a 2% cash back reward program if shoppers sign up for the company’s loyalty program. Understanding the importance of this season’s holiday sales, CVS is hoping to capitalize on its early Black Friday promotion by slashing prices starting November 23rd through the 29th instead of waiting until after Thanksgiving. This head start may help them post a good showing for the fourth quarter as well.

Disclosure: no positions

Comments

[Dan Jacome:]

nice piece, poor macro is helping these companies at the margin as people trade down, and dont forget these companies are increasing their private label mix

2008 Nov 25 09:29 AM