Stores are being renovated, corporate expenses are being cut, and the chain is planning to slow down growth so less money is spent to open new outlets.
Stiffer competition, reform pressures But a severe economic downturn is a tough time to make big changes like these. "In our view, the quarter indicates the continued challenges of fixing the model amid a difficult economy," wrote UBS (UBS) analyst Neil Currie. Discounts and promotions that are needed to draw reluctant shoppers probably bear much of the blame for the quarter's disappointing earnings, Currie said.
The recession has only heightened competition between Walgreen and its rivals, Citigroup (C) analyst Deborah Weinswig points out. She cites Wal-Mart's (WMT) aggressive offering of $4 generic drugs.
Even as it deals with the bad economy and a tough competitive landscape, Walgreen -- like other health-care-related stocks -- could be hugely affected by Obama's health-care reform plans. The cost-cutting deal between Obama and drug companies is one sign of how much the sector's profitability could be squeezed.
"Financially, this is obviously not good news for pharma, but it's the new and inevitable reality that pharma has been anticipating and preparing for -- Democrat in the White House -- for years," wrote Rodman & Renshaw analysts Simos Simeonidis, Elemer Piros, and Ren Benjamin on June 22.
Greater prescription volume? Asked about all of the action on health care in Washington, Walgreen's Wasson said: "There's certainly some threats and there's opportunities."
Among the threats are cost-cutting in the industry, he noted. "So we'll be focused on margin pressure and reimbursement pressure," he said. But he said to expect higher prescription volume, too, both from coverage for an extra 47 million people and from further efforts to improve health through drugs, which are far more cost-efficient than hospital visits.
Walgreen shares fell 5.7% on June 22, to 29.64. Also on June 22, according to Standard & Poor's, stocks in the pharmaceutical industry dropped 1.23%.
Obama has asked Congress to pass a health-care reform bill by August. But even when -- and if -- a massive overhaul is approved, health-care investors will still be left contemplating how other forces will play out: the full impact of the recession on credit-starved consumers; increased competition in different health-care industries; and especially how any reform plan will be implemented in the practical realm. The questions surrounding the sector could persist for years.
A service of YellowBrix, Inc.
