Leading drugstore chain Walgreen (WAG) will report its third-quarter earnings before the market opens on June 25. The stock had had a good run this year, rising over 30%, and is trading near its 52-week high. Major factors contributing to this rise include significant growth in revenue over the previous year after a resolution of a major dispute with Express Scripts, as well as long-term strategic partnerships with Alliance Boots and AmerisourceBergen (NYSE:ABC).
The higher contribution of generics to overall sales will have a negative impact on its overall revenue numbers, although they will improve gross margins. Generic drugs had a 7.3% negative impact on comparable-store revenues for the first six months of fiscal 2013, though they increased gross margins by about 1.3%. We expect a similar trend in the company's upcoming results.
Walgreen reports monthly sales numbers, and the company expects Q3 sales of about $18.3 billion, up 3.3% year on year. About 2% of this growth can be attributed to the increasing store count as Walgreen added about 200 stores over Q3 2012. On a comparable-store basis, revenues are expected to grow by about 1.3% year on year as front-end revenues grew marginally by 0.3%, owing to lower customer traffic.
Number of Prescriptions Filled to Rise Significantly as Express Scripts Dispute Is Resolved
The number of prescriptions filled at comparable stores is expected to increase substantially in the third quarter, as customers continued shifting back to Walgreen after a brief hiatus due to the dispute with Express Scripts last year. The easy availability of drugs and convenience of Walgreen store locations are significant factors behind these customers returning. Walgreen's easy accessibility is further enhanced by the convenience of filling prescriptions using its interactive mobile application and websites.
The company has made significant incremental investments in purchasing prescription files, which will help increase the number of prescriptions filled during this quarter. The gross value of purchased prescription files stood at $1.09 billion on Feb. 28, up from $901 million in the previous year.
Recent Strategic Moves Indicate Good Long-Term Prospects
Walgreen entered into two major partnerships over the past one year: first with Alliance Boots and then with AmerisourceBergen. The company completed an initial 45% investment in Alliance Boots in August 2012 and is satisfied with the latter's performance so far. The strategic partnership aims to create a global pharmacy-led health and well-being enterprise that sells and distributes products and services. The deal also provides Walgreen and Alliance Boots a large platform for further international expansion, using Alliance Boots' experience in expanding into new markets, along with the opportunity to turn Alliance Boots into a global wholesaler. The deal is expected to provide cost and revenue benefits of $100 million to $150 million in the first year and $1 billion by the end of 2016 for both companies.
More recently, the company entered into a 10-year agreement with AmerisourceBergen to jointly source generic drugs and generate logistical efficiencies. ABC provides drug distribution and related services designed to reduce costs and improve patient outcomes. Similar to competitors CVS Caremark (NYSE:CVS) and Rite Aid (NYSE:RAD), which have a generic drug penetration of 75%-80% in the drugs they dispense, much of what Walgreen sells now are bulk, low-profit prescriptions. By combining its distribution in the United States and Europe with ABC, Walgreen will be able to negotiate better prices for bulk drugs. In addition, it will have access to more specialized drugs, like those for cancer treatment. Besides supplementing the product mix, the agreement is expected to reduce Walgreen's cost in sourcing drugs.
We will update our $42 price estimate for Walgreen after the company reports its latest earnings.
Disclosure: No positions.