Walgreen Offers Surprises On 2 Fronts

| About: Walgreens Boots (WBA)

Walgreen Company (WAG) reported fiscal second quarter results that eclipsed estimates and provided insights into a highly lucrative distribution agreement and partial ownership position in with drug wholesaler AmerisourceBergen Corp. (NYSE:ABC) earlier this morning.

The company reported fiscal Q2 revenues of $18.65 billion which exceed our projections of $18.50 billion by $147 million or 0.8%. Company reported earnings were $0.96 on a normalized per share basis that were $0.02 above our $0.94 projection.

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Walgreen also reported a stronger than anticipated margin profile which largely accounts for the per share earnings differential. The company achieved gross margins in excess of 30% in fiscal Q2 which outpaced our 29.7% estimate and the reported operating margins of 6.5% surpassed our 5.8% projection.

The announcement underscores the favorable opinion that we have held regarding Walgreen's long-term prospects and recent performance as highlighted in our February and January 2013 respectively. The improved customer volume following the U.S. influenza outbreak in late 2012-early 2013 coupled with the return of Express Scripts (NASDAQ:ESRX) customers have favorably impacted results.

The Amerisource agreement comes as somewhat of a surprise but is not dissimilar to the approach that Walgreen's had taken when it acquired a position in Alliance Boots. We feel that the agreement with Amerisource will serve to enhance Walgreen's performance metrics related to operating results, margin profile and inventory management over the next several quarters. We believe that the surprise announcement will have a significant negative impact other current Walgreen's wholesalers such as Cardinal Health Inc. (NYSE:CAH) which derived over 20% of fiscal 2012 revenues Walgreen's from according the company's fiscal 2012 10K.

In reviewing Walgreen's fiscal third quarter we are forecasting revenues of $18.50 billion with earnings of $0.93 on a per share basis.

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