ESRX Loss Continues to Hurt Walgreen - Analyst Blog
05 Avril 2012 - 12:30PM
Zacks
The termination of the
Express Scripts (ESRX) contract continues to
hurt Walgreen (WAG) sales which led to a frail start for
Walgreen’s third quarter 2012. For the month of March 2012, the
company recorded a 4.3% dip in year-over-year sales to $6.02
billion. Although total front-end sales witnessed a modest increase
of 2.5% with 1.2% rise in comparable store front-end sales,
customer traffic in comparable stores fell 1.0%. Simultaneously the
number of prescriptions filled by patients reduced drastically. On
a year-over-year basis, prescriptions filled at comparable stores
were down 11.4%.
The Express Script contract loss,
which used to contribute a significant part of Walgreen’s total
sales (12.65% of total prescriptions filled in March 2011), led to
a negative impact of 10.7 percentage points on Walgreen’s
prescription filled. Additionally, lower incidence of flu affected
the prescriptions filled by 0.7 percentage point.
All these directed to an 8.4%
decline in Walgreen’s total pharmacy sales, which attributed the
lion’s share of the total sales of Walgreen (63.5%) in March. There
was 11.1% drag in comparable store pharmacy sales for the month,
owing to the negative impact of Express Scripts contract loss (10.6
percentage points), the introduction of generics in the last 12
months (2.5 percentage points) and lower incidence of cough,
cold and flu (0.9). Further, calendar day shifts negatively
impacted pharmacy sales in comparable stores by 2.1 percentage
points and total comparable sales by 1.3 percentage points.
Year-to-date, total sales rose 1.6%
compared to the same period last year. However, the first 4 months
of the period included the result of Express Script contract that
was ended effective January 1, 2012.
Our Take
Amidst such a major contract loss,
Walgreen remains optimistic about its front-end store sales and
with Easter on April 8, the company assumes better sales
performance for the next month. In March, Walgreen opened 8 new
stores including 1 relocation. At March 31, Walgreens operated
8,300 locations in all 50 states, the District of Columbia, Puerto
Rico and Guam.
Meanwhile, Walgreen is expanding
its business with other payers and customers and implementing
cost-control initiatives. The company is reassured by the fact that
more than 100 of Express Scripts clients, encompassing health plans
and employers, would continue with Walgreen pharmacies in 2012. The
company aims to retain 10 million prescriptions annually and
maintain 97-99% of the 2011 prescription volumes at fiscal 2012
end.
Earlier, in February, specialty
pharmacy services provider, BioScrip
(BIOS) and Walgreen entered into
a definitive agreement, under which the former will dispense
certain community specialty pharmacies and mail service pharmacy
business assets to Walgreens for $225 million. Walgreen anticipates
the transaction to have no material impact on its fiscal 2012
earnings. However, the transaction will be moderately accretive in
fiscal 2013.
Despite its best efforts to counter
the loss of the Express Scripts contract, which accounted for 7.3%
of total sales in fiscal 2011, Walgreen’s financials will continue
to be affected by the loss of the contract. We remain concerned
regarding Walgreen’s continuous deterioration in the number of
prescription filled following the contract loss. We note that in
January this year, Prescriptions filled at comparable stores
decreased 8.6% with negative impact of 10.6 percentage points due
to the contract loss. Again the company witnessed a 9.5% drop in
prescriptions filled in February with 10.7 percentage points impact
of contract loss. We are highly anxious about this and expect the
negative trend to continue throughout fiscal 2012.
Under these circumstances, we
currently prefer to remain on the sidelines until more visibility
is obtained. Walgreen retains a Zacks #3 Rank (short-term Hold
rating). We have ‘Neutral’ recommendation on the stock over the
long term.
BIOSCRIP INC (BIOS): Free Stock Analysis Report
EXPRESS SCRIPTS (ESRX): Free Stock Analysis Report
WALGREEN CO (WAG): Free Stock Analysis Report
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