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Ahead Of The Tape By Spencer Jakab
Checking Walgreen's Vital Signs
From the Wall Street Journal of Mon, 22 Dec 2014 19:55:55 EST

Talk about breaking good. The three big U.S. drugstore chains, Walgreen Co. , CVS Health Corp. and Rite Aid Corp. , have trounced the retail sector and the overall stock market since the start of 2013.

For a while, though, Walgreen looked like it was headed back to rehab. The stock plunged by 18% in early August when it had to cut guidance on what it described as drug-price miscalculations and, perhaps even worse, disclosed it wouldn’t undergo a favorable tax “inversion.” On the basis of a deal shareholders are likely to approve next week to buy the part of Europe’s Alliance Boots GmbH it doesn’t already own, Walgreen appeared entitled to make use of the controversial tax-friendly reorganization. It didn’t fully explain why it eschewed the tactic.

Still, its shareholders seem to be in a forgiving mood; the stock has recovered its losses and then some. This comes despite the fact that expectations for adjusted fiscal first-quarter earnings per share, due Tuesday, have dropped since August to 74 cents from 83 cents.

Analysts may not be optimistic about earnings, but have little to complain about when it comes to revenue. Walgreen has already reported same-store sales grew by 5.8% year over year in the period ended Nov. 30, driven by an 8.3% jump in prescription drugs. This time a year ago, that would have seemed artificial. For much of 2012, Walgreen was embroiled in a ruinous pricing dispute with benefits manager Express Scripts Holding Co. Sales plunged, but rebounded in 2013.

Now, Walgreen appears to be building U.S. market share even as it is about to claim the title of world’s largest drugstore chain following the Boots deal. The benefits of the acquisition itself are tough to gauge since economies of scale are hard to achieve under different regulatory regimes.

In the U.S., three trends are helping Walgreen and competitors: baby boomers with growing prescription needs; a continuing shift toward lower-priced but higher-margin generic drugs; and more high-cost, complicated specialty drugs. Even so, margins are moribund and investors are counting on a cost-saving plan to boost them. And the stock is trading at the highest multiple of the big-three chains on projected earnings.

Due to those latter conditions, Walgreen shareholders could benefit from a dose of healthy skepticism.



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