Walgreen Company (NYSE:WAG) shares soared Tuesday as the company announced higher-than-expected quarterly profits and a new partnership with pharmaceutical distributor AmerisourceBergen Corp. (NYSE:ABC) and European drugstore Alliance Boots.
For the quarter, net sales were flat, but gross margin improved 120 basis points, leading to a 10.7% increase in net income for the quarter. Notably, net sales were only flat by virtue of opening new stores during the quarter, masking disappointing same-store metrics, which ended up somewhat complicated. Overall same-store sales were down several percentage points, while the average customer ticket went up, but customer traffic went down. So, essentially, customers are spending more, but there are too few customers for it to matter, which isn’t a sustainable situation.
Walgreen Company (NYSE:WAG)’s sales have been slumping for a year now, though, so that isn’t anything new. The real story is the AmerisourceBergen Corp. (NYSE:ABC) and Alliance Boots partnership. The partnership will help reduce some of Walgreen’s operational costs, as AmerisourceBergen will begin distributing a number of generic pharmaceuticals that Walgreen traditionally self-distributed. AmerisourceBergen Corp. (NYSE:ABC)’s superior supply chain will allow for greater efficiencies and daily deliveries.
Alliance Boots and Walgreen have also been granted the option to purchase a significant minority equity position in AmerisourceBergen Corp. (NYSE:ABC), through warrants and equity totaling 21% of the company. Once Walgreen and Alliance Boots have together acquired at least 5% of AmerisourceBergen, a Walgreen executive will be placed on the board, and an Alliance Boots executive will be added upon exercise of the warrants.
Alliance Boots is essentially the Walgreen Company (NYSE:WAG) of Europe. Both companies are the largest retail pharmacies in their respective region, putting them in a good position to profit from aging populations that will increasingly need more prescription drugs.
Interestingly, Walgreen purchased 45% of Alliance Boots last summer and has the option to acquire the rest of the company in two years. In that event, Walgreen would have significant influence overAmerisourceBergen Corp. (NYSE:ABC). This is part of Walgreen’s plan to create a “global, pharmacy-led, health and well-being enterprise” — an ambitious goal.
Launching the flagship
Barely mentioned Tuesday, but still important, is Walgreen Company (NYSE:WAG)’s flagship strategy. The company is planning three new flagship stores over the next couple of months, in addition to the current four, which offer, among other things, professional manicures, a cafe, a smoothie bar, and a selection of premium cheeses, fresh sushi, and organic food.