Walgreen Company (NYSE:WAG) Q1 Earnings Preview: What To Watch?

Walgreen Company (NYSE:WAG), the nation’s largest drugstore chain, will release its fiscal 2014 first quarter earnings results on Dec. 20, followed by a conference call with Walgreen’s management beginning at 8:30 a.m. Eastern time.

Deerfield, Illinois-based Walgreen operates a retail drugstore chain engaged in selling prescription and non-prescription drugs, as well as general merchandise. The company operates 8,197 drugstores in all 50 states, the District of Columbia, Puerto Rico and the U. S. Virgin Islands.

Wall Street expects Walgreen to earn 72 cents a share, according to analysts polled by Thomson Reuters. The consensus estimate implies an increase of 24.1 percent from 58 cents a share in the same quarter last year.

[ Related – Rite Aid Corporation (NYSE:RAD) Q3 Earnings Preview: December Runs Green ]

In the past three months, the consensus estimate has dropped by 4 cents from 72 cents and four analysts have cut their profit view in the last 30 days.

Walgreen already reported sales for the first quarter of $18.35 billion, an increase of 6 percent over last year. Sales results consisted of a total comp of growth of 5.5 percent, including a pharmacy sales comp of 7.5 percent, and a front-end comp of 2.2 percent. Prescriptions filled at comparable stores increased 5.6 percent in the first quarter.

The company said that a meaningful increase versus prior quarters in promotional investment contributed to the improvement in traffic and comparable store front-end sales for November and throughout the quarter.

[ Related – Walgreen Co. (WAG) Dividend Stock Analysis ]

The company is also benefiting from better-than-expected savings and revenue from last year’s acquisition of a stake in Alliance Boots. The deal delivered combined first-year net synergies of $154 million, exceeding the previously stated range of $125 million to $150 million. The acquisition of the U.K. drugstore giant provides international expansion opportunities and may offset any shortcomings in the U.S. market

In addition, investors may focus on updates over the new supply agreement with pharmaceutical wholesaler AmerisourceBergen Corp. (NYSE:ABC) and its recent acquisitions of Kerr Drug’s 76 retail drugstores and its specialty pharmacy business, and USA Drug chain.

Pharmacy trends were strong in the early part of the quarter but faded relative to consensus views. Front-end sales also started stronger relative to expectations but began to fade as improving traffic due to stepped up promotional efforts began to take effect as basket growth faded, but struck a better balance among the two components of the front-end comp.

The pharmacy sales provide higher retail margins while the generic drugs come with lower costs and offer around more than 40 percent higher gross profits than branded drugs.

UBS analyst Steven Valiquette noted that the mix of greater promotional activity combined with a lack of generic drug launch activity could contribute to greater gross margin pressure than the Street is currently anticipating. Valiquette sees the first quarter FIFO gross margin contracting about 54 basis points to 29.2 percent.

The market would focus on the forward guidance, especially on the margin front as the next two quarters are likely to be the most challenging quarters from a gross margin perspective within the retail pharmacy sector since 2011. This is due to the timing of generic launches as well as timing of revised pharmacy reimbursement contracts.

However, the good news is that the 2014 generic launch cycle looks robust and gross margins comps should improve as it moves further into 2014. The generic launch cycle is already beginning to ramp, and Valiquette anticipates that gross margin pressure related to the lack of generics should begin to ease beyond this quarter.

Peer Rite Aid Corp. (NYSE:RAD) reported quarterly income attributable to common stockholders of $43.11 million, down from $60.53 million a year-ago. Earnings per share fell to 4 cents from 7 cents last year. Revenues for the quarter increased to $6.36 billion from $6.24 billion in the previous year, and same store sales increased 2.3 percent.

For 2014, Rite Aid now expects net income to be between $204 million or 17 cents a share and $259 million or 23 cents a share. Sales are expected to be between $25.3 billion and $25.425 billion, and same store sales are estimated to range from an increase of 0.35 percent to 0.85 percent. Analysts look for earnings of 24 cents a share on revenues of $25.36 billion.

Walgreen shares have gained 2 percent since its last quarterly report and were up 51 percent this year. The stock, which trades 14.7 times its forward earnings, has traded between $35.77 and $60.93 during the past 52-weeks.