Shares of Walgreen Company (NYSE:WAG), the largest drugstore chain in the U.S., recently tumbled after the company missed analyst estimates on both the top and bottom lines for its third quarter. Walgreen Company (NYSE:WAG) earned $0.65 per share, or $624 million, up 16% from the prior year quarter. Revenue rose 3% to $18.31 million. Wall Street had been more optimistic, expecting the company to earn $0.91 per share on revenue of $18.4 million.
Despite its recent plunge, however, the stock is still up more than 50% over the past twelve months, and many analysts have recommended that investors buy shares on a post-earnings dip. Will Walgreen Company (NYSE:WAG) bounce back quickly, or is this slide a start of a bigger downtrend, especially considering the volatile state of the market?
I love you, I hate you, I need you
Walgreen Company (NYSE:WAG) spent most of last year tangled in a love-hate dispute with its long-time partner, Express Scripts Holding Company (NASDAQ:ESRX). Express Scripts Holding Company (NASDAQ:ESRX) is a pharmacy-benefits manager, a middleman between drug makers and drug store pharmacies. Express Scripts Holding Company (NASDAQ:ESRX) pays Walgreen Company (NYSE:WAG), CVS Caremark Corporation (NYSE:CVS) and Rite Aid Corporation (NYSE:RAD), the three largest drug stores in America, to fill its prescriptions.
However, in 2011, Express Scripts Holding Company (NASDAQ:ESRX) asked Walgreen Company (NYSE:WAG) to lower its required payments, which the company refused to do. In response, Walgreen terminated its partnership with Express Scripts Holding Company (NASDAQ:ESRX) at the beginning of 2012, a terribly rash move considering that Express Scripts Holding Company (NASDAQ:ESRX) prescriptions accounted for 7% of its top line in 2011.
Express Scripts filled an average of 80 million prescriptions annually for Walgreen. Those customers flocked to CVS and Rite Aid Corporation (NYSE:RAD), causing Walgreen’s prescription sales to plunge 8.1% by the fourth quarter of 2012. Walgreen realized that it had made a grievous error in letting Express Scripts go, and resumed their partnership by September. By that time, however, Walgreen had already permanently lost many customers to its rivals. Walgreen addressed these concerns, stating that it had regained some of its lost customer base during the third quarter, which CVS Caremark Corporation (NYSE:CVS) confirmed in its first quarter earnings report.
Generic drugs equal higher margins, lower sales
Walgreen, CVS and Rite Aid have all been aided by an influx of generic drugs, which cost far less than their brand-name counterparts to purchase and to sell. This produces higher margins and profits, but generates lower revenue per sale. This influx was caused by Big Pharma’s loss of patent exclusivity over several major brands over the past two years, which has boosted sales for generic drug manufacturers. Increased sales of generic drugs at Walgreen contributed to a year-on-year rise in gross margin from 28.2% to 28.5%.
Walgreen’s total prescription sales, which comprised 63% of its top line during the quarter, rose 3.4% from the prior year quarter. Meanwhile, same-store prescription sales rose 2%. By comparison, same-store prescription sales at CVS rose 4.7%.
Walgreen’s total prescriptions filled rose 8.7% year-on-year (7.1% on a same-store basis) to 209 million. Its market share in U.S. retail pharmacy also rose from 18.4% to 19.2%. In other words, despite lower revenue growth, Walgreen’s pharmacy business is humming along nicely, and it is steadily regaining lost market share from its rivals.
These boots were made for synergizing
To give its operations the shot of adrenaline it needed to bounce back from the Express Scripts debacle, Walgreen bought a 45% stake in Switzerland-based Alliance Boots for $6.7 billion, its largest acquisition ever, last year. The partnership with Alliance Boots, which owns 3,300 health and beauty stores across 11 countries, is Walgreen’s first overseas expansion. In addition to its retail stores, Alliance Boots also delivers over 4.5 billion units of prescription drugs to health centers, pharmacies and hospitals annually.