Back in June, Walgreen Company (NYSE:WAG) reported an earnings miss as the company continued to have trouble driving customer traffic. At the time, Walgreen Company (NYSE:WAG) executives vowed to fight back by ramping up promotional behavior: i.e., offering bigger discounts.
Walgreen is boosting discounts
Since then, Walgreen Company (NYSE:WAG) has come roaring back. The company delivered steady — if not stellar — sales growth in its recently ended quarter. Walgreen’s return to a more promotional stance is starting to damage smaller rival Rite Aid Corporation (NYSE:RAD). A price war plays to Walgreen Company (NYSE:WAG)’s strength as the largest drugstore chain in the country, while it could further undermine Rite Aid Corporation (NYSE:RAD)’s already-meager profit margin.
Walgreen: return to sales growth
While many retailers have performed poorly this summer, Walgreen Company (NYSE:WAG) had no such problems. Front-end (i.e., non-pharmacy) sales in comparable stores increased by 0.8% in June. Sales momentum improved thereafter; comparable-store front-end sales grew 2.3% and 2.2% in July and August, respectively.
For the full quarter, front-end comparable-store sales were up 1.7%. That may not seem very impressive, but it represents a significant sequential improvement compared to the 0.4% gain Walgreen registered in the May quarter. Moreover, Walgreen had posted declines in the four previous quarters. Comparable-store prescription count was up an even stronger 6.8% for the quarter, as Express Scripts Holding Company (NASDAQ:ESRX) customers continued to return to Walgreens stores.
Rite Aid is peaking
The story is quite different at Rite Aid Corporation (NYSE:RAD). While Rite Aid was the biggest beneficiary of the Walgreen-Express Scripts Holding Company (NASDAQ:ESRX) dispute last year, it’s now losing market share to Walgreen once again. Whereas Walgreen reported a 6.8% jump in comparable-store prescription count for the August quarter, the same measure was flat at Rite Aid Corporation (NYSE:RAD).
This loss of prescription market share has afflicted Rite Aid for many months now. However, the company is now starting to feel pressure from Walgreen’s front-end price initiatives as well.
In June, Rite Aid Corporation (NYSE:RAD)’s front-end comparable store sales grew 0.4%, in-line with the company’s trend for this year. In July, this figure ticked up by 30 basis points sequentially to 0.7%, whereas Walgreen saw a much stronger 150-basis-point sequential improvement. Most disturbingly, whereas Walgreen Company (NYSE:WAG)’s comparable-store front-end sales growth remained above 2% in August, Rite Aid Corporation (NYSE:RAD) last week reported a 1.7% drop in that measure for August.
