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Summary

  • Walgreen wants to become the world's biggest drugstore chain.
  • Walgreen's expansion could generate a lot of revenue and push share values higher.
  • Walgreen is in an excellent position to tap the online market with Google's help.

Walgreen (WAG), the staid old drugstore chain is up to something very interesting; according to Sarah Kliff of The Washington Post's Wonkblog, it is after nothing less than global domination. What Kliff really means is that Walgreen wants to be the No. 1 drugstore chain in the world, and it has a plan to get there.

That, of course, brings up some very interesting questions for investors, such as: Is this plan realistic, and more importantly, will it make Walgreen a lot of money? After all, if Walgreen could become the Wal-Mart or Amazon.com of the drugstore business, it could conceivably generate a lot of revenue and a huge cash flow.

Walgreen has made a number of good strategic moves designed to achieve global drugstore domination, according to Kliff, including:

  • Bought 45% of Britain's drugstore chain Alliance-Boots, with an option to buy the rest of the company in 2016.
  • Is now operating 11,000 drugstores and 370 distribution centers worldwide.
  • Has forged an alliance with Italian billionaire and deal maker Stefano Pessina, who is now the largest holder of Walgreen stock. Pessina was formerly the largest holder of Alliance-Boots stock.
  • Is participating in Google Shopping Express, a same-day home delivery experiment from Google (GOOG, GOOGL).

So that's the plan that Walgreen CEO, Gregory D. Wasson has been pitching to investors. Now for the big question: Is it working?

Revenue Tells a Slightly Different Story

The best answer I can come up with is "maybe." Some of the numbers seem to indicate that global drugstore domination might work, and some indicate it will not.

Walgreen's TTM revenue increased by 4.8% between February 2013 and February 2014 -- that equals an increase of $3.4 billion. The revenue has been increasing, but not by levels that would indicate global drugstore domination is actually occurring.

On the other hand, Walgreen's diluted EPS tells a slight story. On Feb. 28, 2014, Walgreen reported a diluted EPS ratio of 2.836%. That was only slightly higher than the 2.234% diluted ratio for February 2013. Walgreen has not been able to translate those increased revenues into earnings.

Walgreen's biggest competitor, CVS Caremark (NYSE:CVS), made more money with a much smaller growth in revenue. CVS's trailing revenue increased by 2.99%, or $4.18 billion, between March 2013 and March 2014. In contrast, CVS Caremark's diluted EPS increased by nearly a point between March 2013 and March 2014. For the record, CVS reported a diluted EPS ratio of 3.203% in March 2013 and 3.929% in March 2014.

To be fair, CVS was not going through the kind of expansion that Walgreen was. It was not buying up online competitors nor trying to enter the British market. Nor did CVS get itself into a destructive battle with Express Scripts (NASDAQ:ESRX) the way that Walgreen did.

If Walgreen wants global drugstore domination, the company is going to generate higher revenues, and soon. There's no way it will be able to achieve that plan without a lot of cash.

Walgreen May Not Be a Growth Stock

Despite its expansion, Walgreen doesn't look like a growth stock because of another of its financials: cash from operations. Walgreen reported $3.739 billion in cash from operations on February 28, 2014, in contrast to $4.41 billion in February 2013.

That indicates Walgreen simply isn't making extra money from its expanded operations. Indeed, it might be losing money. In contrast, CVS Caremark reported $6.31 billion in cash from operations on March 31, 2014, up from $5.52 billion in March 2013.

That means Walgreen is having a hard time maintaining cash flow at a time when there are some problems on the horizon; the biggest ones are such competitors as Wal-Mart Stores (NYSE:WMT), Costco Wholesale (NASDAQ:COST), The Kroger Co. (NYSE:KR) and Amazon.com (NASDAQ:AMZN), in addition to CVS Caremark. Wal-Mart, Kroger, and Costco all compete directly with Walgreen in prescriptions, and they are in a good position to challenge it in the online market.

Wal-Mart and Kroger also offer same-day home delivery in some markets, which Walgreen does not. Amazon.com offers many of the same products as Walgreen, with the added incentive of home delivery. Costco is also participating in Google Shopping Express. The good news is that Walgreen, with all its distribution centers and stores, is in a good position to tap the online market. Utilizing Google Express could give Walgreen delivery capabilities similar to Amazon's Prime, without having to hire drivers or buy its own delivery vehicles.

Global drugstore domination may not be a realistic goal for Walgreen, its attempts to achieve that goal are not leading to increased cash flow or revenues. Perhaps it's time for Walgreen management to reevaluate its grandiose plans and concentrate on more down-to-earth matters such as day-to-day retail operations, like CVS Caremark is.

Disclosure: I am long KR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.