Earnings Preview: Walgreen - Analyst Blog

Walgreen (WAG) is scheduled to release its first quarter of fiscal 2011 earnings on December 22, 2010, before the market opens. The company is expected to earn 53 cents during the quarter, according to the Zacks Consensus Estimate.

The company has already reported $17.33 billion of total sales for the first quarter, up 5.9% from $16.36 billion in the year-ago period. While comparable store sales (those open for more than a year) during the quarter increased 0.8%, front-end comparable store sales increased 0.4% with prescriptions filled at comparable stores increasing by 2.2%. During the conference call, we are expecting Walgreen to give a detailed outlook on consumers' shopping trends during the holiday season.

Previous Quarter Highlights

Walgreen reported an EPS of 49 cents in the fourth quarter of fiscal 2010, surpassing both the Zacks Consensus Estimate and the year-ago quarter by $0.05. However, results for the quarter included $0.01 toward restructuring cost and $0.04 for the Duane Reade acquisition. The fourth quarter in fiscal 2009 included $0.03 per share toward restructuring costs.

Net sales for the quarter increased 7.4% year over year to $16.9 billion, marginally beating the Zacks Consensus Estimate of $16.8 billion. While comparable store sales (those open for more than a year) increased 1.5% during the quarter, sales of front-end comparable drugstores increased 1.2%.

Agreement of Analysts and Magnitude of Estimate Revisions

Estimate revision trends among analysts depict a positive bias for the company's earnings in the first quarter. Over the last 30 days, estimates have been revised in both the directions by an analyst each. Moreover, 1 analyst has increased his/her estimate in the last 7 days. While no downward revision has taken place for fiscal 2011, 3 analysts have increased their estimates in the past 30 days with the same trend being maintained by 2 analysts in the past week.

Apart from an update regarding consumers' shopping behavior, we are also awaiting an update regarding Walgreen's Customer-Centric Retailing (CCR) initiative. During fiscal 2010, Walgreen had converted or opened 1,500 stores to the CCR format, bringing the total number to more than 1,800. By the end of calendar year 2010, the company plans to have over 2,000 CCR stores. Moreover, beer and wine has been rolled out in 4,200 stores, which will be expanded to 5,000 by the end of 2010. The conversion cost of the stores, on an average, has been at $50,000 per store.

Walgreen has been preparing to provide flu shots to more customers during this season and has also increased advertising to meet the objective. The company is intending to deliver 15 million flu shots compared to 7 million administered last year. During the season, till November, the company has administered nearly 5.6 million shots. The company is likely to update its expectation regarding flu vaccination during the call.

For the first quarter, there has not been any revision in estimates in the past 30 days. Similarly, for fiscal 2011, estimates have remained unchanged for the last 60 days at $2.49.

Surprise

Analyzing past trends, Walgreen has missed estimates in two of the last four quarters. The company has a negative four-quarter average of 0.52% which means that, on an average, Walgreen has missed the Zacks Consensus Estimate by 0.52% over the last four quarters.

Our Recommendation

We are encouraged by Walgreen's progress with respect to the CCR rollout and its advances made for meeting the targeted savings under the rewiring initiative. Based on a strong cash balance, the company has rewarded its shareholders and is well equipped to pursue suitable acquisitions in future. However, the current economic scenario continues to be our major concern. Additional challenges remain in the form of reimbursement issues and slower introduction of generics.

We have a Neutral recommendation on the stock.