Walgreen Company Delivers a Prescription for Growth

Source: Walgreen.

Walgreen Company is the nation's biggest pharmacy store operator, with more than 8,200 stores, but it's also becoming a major global drug retailer thanks to its merger with Alliance Boots, which should be completed at the end of this year. As a result, Walgreen is positioned perfectly to benefit from tailwinds tied to both an ever increasingly insured population and rising demand from aging populations in the United States and Europe.

Delivering the goodsThose tailwinds may already be supporting results, given that sales at the company improved by 6.7% year over year in the company's just reported fiscal first quarter.

That sales strength was driven primarily by rising pharmacy script volume. During the quarter, Walgreen filled 221 million prescriptions, or 4.1% more prescriptions than it filled a year ago, which brought its prescription market share to 19%.

Including new stores, pharmacy sales grew 9% year over year in the quarter, while pharmacy sales at stores open at least one year grew 8.1%. Sales at the front end of the store also improved marginally, growing by 1.5% versus last year, as 2.7% fewer shoppers spent 4.2% more during their visits. As a result, Walgreen's overall same-store sales improved by 5.7%.

The results generally outperformed Rite Aid , which reported results a week ago. During its recently completed quarter, Rite Aid reported that its pharmacies delivered same store growth of 7.2% and that its overall same store sales had improved by 5.4%.

Dropping to the bottom lineAlthough Walgreen had to navigate tighter margins tied to generic pricing power and more low-profit Medicare and Medicaid customers (headwinds that similarly weighed on Rite Aid's results), some of Walgreen's profit headwind was offset by cost savings tied to early integration efforts of Alliance Boots, a major drug distributor and retailer in Europe.

Walgreen reports that it achieved net synergies from Alliance Boots that were worth $140 million during the quarter, or roughly $0.11 per share. That prompted the company to guide investors to expect total merger synergies of $650 million for the entire fiscal year.

As a result of those synergies, Walgreen's gross profit margin dropped by less than it would have otherwise during fiscal Q1, falling 1.2% year over year. Overall, the combination of sales growth, margin headwinds, and belt tightening resulted in net earnings improving to 4.1% of total sales from 3.8% of sales last year, which worked out to adjusted EPS of $0.81 in the quarter, up from $0.72 a year ago.

Looking aheadWalgreen expects to deliver top-line sales of between $126 billion and $130 billion in fiscal 2016, which should translate out to EPS of between $4.25 and $4.60. If the company can deliver on that forecast, it would mean that investors are paying roughly 18 times the low end of fiscal 2016 earnings-per-share estimates, or 16.63 times the high end of that guidance to own shares in Walgreen. Since investors were paying just about 11.25 times forward earnings as recently as 2012, Walgreen isn't cheap, but it's also not out-of-this-world expensive, either. As a result, investors considering whether to own Walgreen will need to focus their attention on whether the company can over-deliver on its projected Alliance Boots savings. If it can, then shares should climb. Since the number of people insured through private and public insurance is expected to grow in the coming year thanks to healthcare reform, I'm willing to give Walgreen the benefit of the doubt.

The article Walgreen Company Delivers a Prescription for Growth originally appeared on Fool.com.

Todd Campbellis long Rite Aid. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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