Ouch. If you own Walgreen stock, you're likely feeling some pain after Tuesday's drop of nearly 6%. Shares fell the most in months on news that the big pharmacy chain missed the consensus earnings estimates for its fiscal 2013 third quarter. Does the pullback present a good opportunity to buy the stock? Let's take a look.
Behind the miss
Analysts expected adjusted earnings of $0.91 per share. Walgreen actually reported $0.85 per share.
CEO Greg Wasson said that "front-end sales are still not up to our expectations." This was borne out in Walgreen reporting a 3.9% decline in customer traffic in stores open at least for a year. Total sales in these stores increased by a meager 1.4% year over year.
Wasson attributes some of the disappointment to weather, which affected sales negatively during the quarter. He also noted continuing effects of the sluggish economy. Economic woes particularly affected Walgreen stores in lower-income areas, which have generally performed below the levels of its stores in middle- and higher-income communities.
The aftermath of the dispute with Express Scripts also continues to play a factor for Walgreen. After the two sides couldn't come to an agreement, Walgreen allowed its contract with Express Scripts to expire at the end of 2011.
That move didn't go so well for the pharmacy chain, though. The companies ended up signing a new multiyear agreement by mid-2012. However, many customers left Walgreen during the first half of the year. Not all have come back.
Rest of the results
Outside of the earnings miss, how do Walgreen's quarterly results look? The company posted sales of $18.3 billion, an increase of 3.2% compared to the same quarter in the prior year.
GAAP diluted earnings came in at $0.65 per share. That reflects improvement over the $0.62 per share reported in the fiscal 2012 third quarter. Walgreen reported GAAP net income of $1.79 billion, up 1.1% year-over-year.
Although the company missed estimates, the adjusted earnings of $812 million. That reflects a 29.3% increased compared to the same quarter last year.
Walgreen also opened or acquired 39 new stores during the quarter. During the third quarter of fiscal 2012, the company counted 52 new stores.
Walgreen has several things going for it. The company, along with partner Alliance Boots, announced a 10-year agreement with AmerisourceBergen in March. Under the terms of the deal, AmerisourceBergen will distribute branded pharmaceutical products to Walgreen stores and eventually generic drugs.
This arrangement, on top of the current partnership with Alliance Boots, should enable Walgreen to achieve operational efficiencies that it couldn't do on its own. It also allows Walgreen and Alliance Boots to pick up a minority stake in AmerisourceBergen.
The real key for Walgreen, though, is regaining more of the customers lost with the Express Scripts debacle. To that end, the company has signed up 75 million people in its Balance Rewards loyalty program. Around 60% of purchases in its stores are now made using the loyalty card. Walgreen is just beginning to realize the fruit from the program and should be able to customize its marketing more effectively going forward to keep existing customers and gain (or regain) others.
Analysts following the company expect that it will grow earnings more quickly in the next few years than it has over recent years. I suspect they'll prove to be right. Walgreen isn't likely to make further missteps with contractual agreements and should benefit from its renewed customer focus.
Over the long run, I think Walgreen stock should do well for investors. And its 2.3% dividend yield should help assuage at least a little bit of the pain felt with the occasional earnings miss.
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