Walgreen Company (WAG): Why Investors Should Not Give up on This Drug Retailer

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Walgreen Company (NYSE:WAG), along with its partnership with Alliance Boots, has strengthened its long-term position by working with AmerisourceBergen Corp. (NYSE:ABC) to become the world’s largest drug buyer. However, its short-term margin remains under pressure as reflected by the disappointing Q3 2013 results.

Results and concerns

Walgreen Company (NYSE:WAG)

Walgreen Company (NYSE:WAG) tumbled near 5.9% on June 25 after releasing Q3 adjusted earnings of $0.85 per share, which was below analysts’ estimated earnings of $0.91 per share. Due to a weaker British pound, Walgreen lowered its earnings expectation from Alliance Boosts for Q4 by a penny to $0.08 per share. For the full fiscal year, the adjusted EPS estimate was lowered to $0.16 from the previous estimate of $0.18 to $0.22.

The company’s margin will be negatively impacted by a trough in the generic wave, which is expected to continue until the latter half of fiscal 2014, and stronger promotion and pricing initiatives designed to drive traffic and front-end comps.

On the positive side, the company continues to be on track to deliver $125 million to $150 million in combined synergies from its joint-synergy program with Alliance Boots, which is on track with the previous target of $100 million to $150 million. Walgreen also generated strong cash flow of $1.4 billion with $1.1 billion in free cash flow.

What is Walgreen doing?

With its partnerships with Alliance Boots and AmerisourceBergen, Walgreen Company (NYSE:WAG) is strengthening its global sourcing ability, firming up its buying power of generic drugs and expanding its accessibility to specialized drugs. In June, Walgreen launched the Boots No 7 men’s product line in more than 5,000 stores, which is in addition to the successful No 7 women’s skincare line. With its new partnership with AmerisourceBergen Corp. (NYSE:ABC), Walgreen will begin new deliver models to optimize frequency and improve local assortments.

Walgreen Company (NYSE:WAG) is positioning itself for long-term growth by creating a better experience with a clear three-point plan. The company will adjust its pricing and promotion throughout Q4, focus on maximizing the value of its Balanced Rewards program and enhance its store segmentation to better serve the local needs.

Competition

Walgreen Company (NYSE:WAG) continues to win back Express Scripts Holding Company (NASDAQ:ESRX)’s customers and gain more new Medicare Part-D customers, as demonstrated by a 7.1% increase in its retail comp scripts.

CVS Caremark Corporation (NYSE:CVS), the largest integrated pharmacy company in United States and one of Walgreen Company (NYSE:WAG)’s major rivals, is targeting compound growth rates of 5% to 8% on the top line and 7% to flat performance in adjusted EPS for the five-year period ending 2015. CVS Caremark is improving its accessibility and lowering its overall healthcare costs to align with the direction in which healthcare is headed. CVS Caremark Corporation (NYSE:CVS) also expects to retain at least 60% of the 24 million gained scripts due to the Walgreen-Express Scripts dispute.

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