After Strong Sales Results, Is Walgreen a Strong Buy?


Source: Wikimedia Commons

On March 5, shares of Walgreen ended the day down nearly 1% as the S&P 500 index stayed roughly even. The reason for the stock's drop was the sales release the business made public covering the month of February as well as results for the fiscal second quarter. In response to this decline, should the Foolish investor consider the company's recent developments too risky to warrant an investment, or is now a good time to buy shares on the cheap?

Walgreen's sales results were actually strong!
Seeing results for Walgreen's monthly performance and its second quarter, investors are probably left wondering why the world's second-largest drugstore chain didn't see a jump in share price as opposed to the fall it experienced. For the month, sales rose 5% to $6 billion from approximately $5.8 billion in the year-ago period.

Although the business saw sales rise in its front-end operations, the primary source of growth reported was its pharmacy sales. For the month, the company's pharmacy revenue rose nearly 7%, as comparable-store sales soared more than 6%. The only drag on the business was a higher proportion of generic drugs on its shelves, which negatively affected the company's pharmacy revenue by 1.4%.

Source: Walgreen

For the quarter, Walgreen's results were still strong. Revenue rose 5.2% from $18.6 billion to $19.6 billion. This slightly beat the $19.5 billion in revenue that Mr. Market anticipated and was mainly attributable to a 4.5% increase in comparable- store sales.

How does Walgreen stack up to the competition?
Over the past four years, Walgreen has done well for itself but hasn't been a superstar. Between 2010 and 2013, the company saw its revenue rise 7% from $67.4 billion to $72.2 billion. In terms of profitability, the business did a little better but not much, with net income rising 17% from approximately $2.1 billion to about $2.4 billion.

The disparity between the company's revenue increase and net income performance was due, in part, to its cost of goods sold falling from 71.9% of sales to 70.8%; meanwhile its income from Alliance Boots (a company it is acquiring) helped prop up its bottom line. These improvements were, however, offset by a rise in the business' selling, general, and administrative expenses, which rose from 23% of sales to 24.3%.

As mediocre as Walgreen's performance may appear, it's better than the way rival Rite Aid has fared. Between its 2010 and 2013 fiscal years, the company saw its top line fall 1% from $25.7 billion to $25.4 billion. The reason for this drop in sales stems from the company's decision to consolidate operations and focus on returning to profitability rather than trying and grow.

You see, for the past few years, Rite Aid's net income has been in negative territory because of a bloated cost structure and significant impairment charges. In 2010 alone, the company's net loss came out to $506.7 million.

Fortunately, because of its initiatives, the company's cost of goods sold fell from 73.4% of sales to 71.2%, while its selling, general, and administrative expenses only rose slightly; from 25.7% of sales to 26%. This has resulted in the business' net income turning positive in 2013 at $118.1 million, marking the first time since 2006 that the business turned a profit.

While Walgreen has done well compared to Rite Aid, the business has had a hard time keeping up with CVS Caremark . During the same time frame as its peers, CVS has seen its revenue soar 32% from $95.8 billion to $126.8 billion. In an effort to become the Wal-Mart of drugstores, CVS has done all it can to grow sales.

In the long run, this move can grant the business unprecedented buying power, but the downside is that its profits can be depressed for some time. This is made evident in the company's financial results between 2010 and 2012. During this period, CVS recorded a modest 13% increase in net income to approximately $3.9 billion at a time when its revenue rose 29%. In 2013, though, as the business slowed its top-line growth to 3%, its bottom line jumped 19% to approximately $4.6 billion.

Foolish takeaway
Based on the data provided, it looks as though Walgreen had a strong quarter and a strong month in February. Moving forward, it's difficult to tell if the business can maintain this kind of growth, but if it can, it will make for an interesting investment prospect. However, it's important to realize what kind of investment Walgreen is.

Although the business exhibited attractive growth, its long-term performance suggests that it can't hold a candle to CVS. On the other hand, the company's focus on respectable growth, accompanied by nice improvements in profitability, makes it a good play in the drugstore business for those investors looking for a nice, conservative opportunity.

Is Walgreen a company to hold forever?
Because of Walgreen's position as a nice, conservative investment, is it one of The Motley Fool's three stocks to own forever? If not, what other opportunities await the Foolish investor moving forward?

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Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends CVS Caremark. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published