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Walgreen (WAG - commentary - Cramer's Take) reported fiscal third-quarter results on Monday, June 23, and earnings per share missed analysts' consensus by a penny, growing just 4% year over year. Growth continues to slow at what was once the premier retail drugstore chain in the country. Year over year, revenue grew 10%, operating income grew 7%, and net income grew 2%.
There is no question that growth has been stifled at WAG, as EPS growth has been no faster than mid-single digits the last four quarters, and management has posited that "organic growth" will be around 8% for the foreseeable future. Walgreenss is part health care and part retailer: Customers come into the store for prescriptions and leave with a couple of items for "convenience shopping." The margins are higher on this front-end business, and Walgreen's is opening smaller health care clinics to offer basic medical services, to capture additional foot traffic. A Changing MixPart of the slowdown in growth is also due to the squeeze on the consumer from higher oil, gasoline and energy prices. But I would attribute some of the slowdown to the fact that Walgreen's is similar to retailers like Best Buy (BBY - commentary - Cramer's Take), in that while it is taking market share from the smaller, inefficient competitors such as mom-and-pop stand-alone drugstores and chains like Rite Aid (RAD - commentary - Cramer's Take), over the longer term Walgreen will get squeezed by the mass merchants like Costco (COST - commentary - Cramer's Take), Wal-Mart (WMT - commentary - Cramer's Take) and the major-chain grocery stores that have begun to add pharmacy as a separate counter.
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At the time of publication, Gilmartin was long Walgreen's, Wal-Mart and Costco, although positions may change at any time.Brian Gilmartin, CFA, founded Trinity Asset Management (TAM) in 1995, where he is currently a portfolio manager. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gilmartin appreciates your feedback; click here to send him an email. Brokerage Partners
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