NEW YORK (TheStreet) -- Walgreen (WAG) rose 4.35% to $67.11 at 10:35 a.m. on Tuesday despite its second-quarter earnings report that came up short of analysts' expectations. A slowdown in generic drug introduction and a mild flu season hampered the largest U.S. drugstore chain's performance.
Walgreen reported a year-over-year decline in net income to $754 million, or 78 cents a share, from $756 million, or 79 cents a share. Profit excluding items was 91 cents, two cents less than the consensus estimate of analysts polled by Thomson Reuters. Walgreen said price cuts it made to compete with rivals during the difficult holiday season also put pressure on its second-quarter profit.
Gross profit margin declined 1.3% year over year to 28.8%. Sales rose 5.1% to $19.61 billion, while comparable-store sales in stores open at least a year rose 4.3% thanks mostly to prescription sales gains, which generate almost two-thirds of the company's revenue. Comparable-store sales of general merchandise ticked upward just 2% thanks to fewer shoppers entering Walgreen's drugstores.
CEO Greg Wasson said the pressure from fewer new generic drugs would lighten in the second half of the fiscal year. The company also said its partnership with Alliance Boots Holdings, which runs the largest European pharmacy chain, could generate synergies between $375 million and $425 million, up $25 million from its previous estimate. Walgreen wants to combine the companies' drug purchases and sell the European products in its stores.
Walgreen bought 45% of Alliance Boots in 2012 with an option to buy the remainder in 2015.
TheStreet Ratings team rates WALGREEN CO as a "buy" with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:
"We rate WALGREEN CO (WAG) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance, impressive record of earnings per share growth, compelling growth in net income and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company shows weak operating cash flow."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth came in higher than the industry average of 7.2%. Since the same quarter one year prior, revenues slightly increased by 5.8%. Growth in the company's revenue appears to have helped boost the earnings per share.
- Powered by its strong earnings growth of 67.44% and other important driving factors, this stock has surged by 66.94% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, WAG should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
- WALGREEN CO reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. During the past fiscal year, WALGREEN CO increased its bottom line by earning $2.56 versus $2.42 in the prior year. This year, the market expects an improvement in earnings ($3.47 versus $2.56).
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Food & Staples Retailing industry. The net income increased by 68.3% when compared to the same quarter one year prior, rising from $413.00 million to $695.00 million.
- WAG's debt-to-equity ratio is very low at 0.25 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Even though the company has a strong debt-to-equity ratio, the quick ratio of 0.42 is very weak and demonstrates a lack of ability to pay short-term obligations.
- You can view the full analysis from the report here: WAG Ratings Report