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Drugstores Could See Strike Premium

Longs, Rite Aid and Walgreen have been picking up residual customers.

Three national drugstore chains stand to become innocent beneficiaries of the

70,000-strong grocery workers' strike in Southern California.

Supermarket customers unwilling to cross the picket lines are moving their business to local

Walgreen

(WAG)

,

Rite Aid

(RAD) - Get Rite Aid Corporation Report

and

Longs Drug

(LDG)

stores for pharmacy-related services, and are finding that the stores' grocery offerings aren't bad, either. That, analysts say, is helping create new customer loyalties that might not reverse once the strike ends.

While Walgreen and Rite Aid have yet to provide any strike-related numbers, most analysts expect that the walkouts have helped them. A Rite Aid spokeswoman noted that, in light of the strikes, the company has added extra staff to ensure that current and potential new customers are able to get prescriptions.

Once the strike ends, "it's very likely customers will stay for the prescriptions if they have switched over" from grocery stores, said Richard Hastings, retail sector analyst at Bernard Sands.

Walgreen shares are up about 10% since the strike began Oct. 11, while Rite Aid has risen about 4% and shares of Longs are up about 5%.

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Smith Barney Citigroup analyst Lisa Cartwright expects Rite Aid's and Walgreen's sales growth to benefit by 400 basis points in November alone. Deerfield, Ill.-based Walgreen has 4,291 total stores in the U.S. and about 120 stores in Southern California, while Camp Hill, Pa.-based Rite Aid has about 3,400 total stores and 360 in California.

Wholesale club

Costco

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also stands to benefit, analysts say, because it has pharmacies and offers groceries as well. The company reported Thursday that same-store sales increased 14% in November.

Meanwhile, Longs Drug said on Nov. 20 that the strike added a penny a share to third-quarter net income and aided same-store sales by 80 to 100 basis points. Longs, based in Walnut Creek, Calif., has 450 total stores on the West Coast and in Colorado. Shares of the company closed Thursday at $23.56, down 34 cents, or 1.42%.

Hastings, who holds no shares of any of the stocks in his coverage area, believes that customers previously had been getting prescriptions filled from a mix of grocery stores and drugstores. But due to the strikes, they have turned to the drugstores, he said.

In his view, Walgreen will be the biggest beneficiary of the strike. On Tuesday, the company reported that pharmacy total sales increased 16.1% in November. It also said pharmacy comp-store sales increased 12.2%, and that total prescriptions filled at those stores rose 5.9%.

Overall, total comparable-store sales increased 10.7% in November at Walgreen. Analysts say front-end sales, which had a 8.3% rise in comps, were the main drivers of the overall increase.

These front-end sales are where analysts mostly expect drugstore sales to benefit from the strike, besides new pharmacy customers, that is. Front-end sales often are in consumables such as milk, bread, and snacks, goods that shoppers ordinarily would buy at the supermarket. "If

drugstores don't have consumables, then the grocery strikes don't make much of a difference," Hastings said.

Hastings noted that Walgreen, Longs and Rite Aid lately have been successful at improving their consumables offerings, which also include ice cream, bread and orange juice. Like prescription drugs, consumable sales increase traffic, he said. Most importantly, consumable purchases "typically build consumer loyalty over time."

Additionally, the drugstores are now benefiting from new customers who make small, frequent purchases. This is especially true for seniors, where convenience is a necessity, and who generally would like to visit grocery stores for these types of trips, Hastings said.

A key area in which chain drugstores make an impression on new customers is in checkout speed, said Hastings. "That's what the chain drugstores are all about -- to get you out as fast as possible," he said, noting that that motivation is Walgreen's "secret weapon." Topping it off, many Walgreen stores are open 24 hours a day.

Rite Aid, on the other hand, has been hurt by years of mismanagement and resulting financial troubles, Hastings said. "They are now achieving an outstanding turnaround, though there is still plenty of work to be done," he said, noting that the company's shares are up around 100% from the lows of early 2003. Shares were recently down 5 cents, or 0.8%, at $6.24.

But details regarding the benefits to Rite Aid's earnings and sales are unavailable. The company reports November comparable-store sales on Dec. 9. Banc of America analyst Bob Summers expects the company to report a total same-store sales increase of 6.8%, with front-end same-store sales up 6.3%. Third-quarter earnings will be released on Dec. 18; consensus is for a profit of 2 cents a share.