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Walgreen Still Healthy Despite Missing Earnings Again

In its previous quarter, Walgreen's gross profit margin dropped by 1.3 percentage points from the corresponding quarter last year to 28.8%. Last year, the company reported its results during the peak of the generic drug wave, which gave a boost to its margins. This year, the company witnessed the bottom of the generic drug wave. Moreover, an increase in promotional investments also dragged the margins.

Despite the drop in margin, the situation is not alarming. The company's profitability is still better than its historical average. Since FY2010, on an average, Walgreen has reported annual gross margin of 28.45%. The company is considerably more profitable than CVS Caremark, with an average annual gross profit margin of 19.3% in the corresponding period. Moreover, unlike Walgreen, CVS Caremark's gross profit margin shows a negative trend as they have fallen from 21% in FY2010 to 18.8% in FY2013.

Despite deteriorating margins, CVS Caremark has shown significant top-line growth. From FY2010 till the end of FY2013, CVS Caremark reported more than 30% growth in revenues. In the same period, Walgreen's revenues increased by just 7.1%.

However, when it comes to profitability, Walgreen is far ahead of the crowd. Walgreen's gross profit margin is considerably higher than the industry's average of 16.6%, according to data compiled by Thomson Reuters.

Walgreen's investment in Alliance Boots has generated synergies of $236 million in the first half of the current fiscal year. Walgreen is now eying synergies worth $375 million to $425 million in the second half, which is an improvement of $25 million from the previous estimate. By 2016, Walgreen is expecting to achieve synergies of $1 billion.

Moreover, positive secular trends, such as the expected increase in the elderly population by 45% by 2025 and the expanded medical coverage under the Affordable Care Act could fuel the company's growth in the long term.

By the end of fiscal year 2016, Walgreen is eying operating income of more between $8.5 billion and $9 billion from revenues of more than $130 billion. This would be a significant improvement from the previous fiscal year when Walgreen reported operating income of $4.47 billion from revenue of $72.2 billion.

This also implies that Walgreen could remain highly profitable. The low end of its 2016 target shows an operating margin of 6.54%, which would show an improvement from 6.19% in 2013. This is encouraging as the company's operating margin is already nearly twice as large as the industry's average of 3.22%, according to data compiled by Thomson Reuters.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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