With Declining Store Growth, Can Walgreens Meet Its Required Business Performance?

Walgreens (WAG) drugstores have become as ubiquitous as Super Wal-Marts (WMT) throughout most of the United States. Their familiar neighborhood corner locations serve more than five million customers every day, and produced $63 billion in revenue in the fiscal year that ended this past August.

The current price of Walgreen stock implies growth in revenue of 6.9% over the next twelve months. For the fiscal year ending in August of 2008 revenue grew 9.8%, but for the most recent fiscal year revenue grew only 7.3%. But the company’s remarkably consistent history of growth is also relevant—revenues have grown every year for an incredible thirty-four consecutive years. Over the past ten years, this growth has averaged 13.6%, although this rate of growth is slowing. Check out the chart below. Clearly revenue growth is remarkable, but should it be alarming that it has slowed so much over the past ten years? How much of this is already baked into the stock price?

The slowing rate of growth is likely an important reason why the stock has returned nothing beyond its dividend to shareholders since 2002. But the company should be able to maintain its current, relatively low growth rate despite recent declines. A 6.9% growth in revenue implies 483 new stores. In fiscal year 2009 the store opened 554 new stores, yet the company has announced plans to slow store growth to less than 300 annually. Perhaps growth in same-stores sales seems poised to pick up the slack and make 6.9% total sales growth attainable?

In September same-store sales grew a remarkable 5.2%, due in large part to the company’s successful flu shot program. Pharmacy sales grew 7%, while front end sales (general merchandise and photo services) grew 2%. That front end sales grew at all is noteworthy, as all major competitors saw flat or negative growth in such sales due to the weak economy. But is this enough to make up for the continually falling sales growth? Below is an RBP Snapshot of the company. I wonder how realistic these sales growth numbers are:

Ostensibly, the company sees its stock as undervalued. For most of its history Walgreen carried no debt on its balance sheet. However, in 2007 it began restructuring its capital as it initiated a share repurchase program that was financed in part by $1 billion in borrowing. The company’s expansion had always required tremendous amounts of capital expenditures, though previously internally generated capital was used exclusively. But with interest rates low and a rock-solid balance sheet, the company began borrowing. Through August 31, the company had accumulated just over $2.3 million in debt and announced in October that it expanded its share repurchase program by an additional $2 billion.