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Walgreens Wobbly Narrative $WAG $ESRX

Walgreens

Walgreens (Photo credit: Wikipedia)

Walgreen (NYSE:WAG) reported top line growth for Q2. Stock pops a little. But lets take a look at some of the fundamentals that should be driving the narrative.

Firstly they lost their hook up with Express Scripts. Oh well everyone else will just have to work harder. Hmm tough to execute

Secondly they are complaining that this years cold and flu season was unseasonably mild. In this context they are posturing themselves according to  President and CEO Greg Wasson with a ‘Well at Walgreens’  strategy to become America’s first choice for health and daily living. From a marketing point of view the strategy may not be resonating as deeply as management may want. Flu shots are off by about 700,000. You take the flu shot in advance. Once you get sick it’s too late. Yes public anxiety does drive flu shots but Walgreen cannot sit back and passively wait for public anxiety. That is not congruent with becoming the first choice for health and daily living.

Thirdly prescription sales are down 4.2% yoy. Sure the front of the store picked it up. No information on any specific product line was provided. But you cannot rely on non pharma products driving record sales when prescription sales are tanking.  The wild card is Express Scripts (Nasdaq:ESRX) ability to take more customers out of the Medco transaction. Management was upbeat on the conference call but that could just be whistling through the graveyard.

Fourthly cash and equivalents has decreased from $2.2 Billion to $1 Billion. Debt levels have remaining relatively unchanged, which is not necessarily a good thing. Here is some of what they have done with the cash.  Dividend payments and stock repurchase account for about $1.4 Billion. Accounts payable have been reduced by $700 million so Walgreen must be very popular with the trades. Quite simply the business is using more cash than it is generating. The primary culprit is the repurchase of shares which of course is the financial engineering tool of choice to manage earnings per share.

Bottom line: Decreasing prescription sales cannot be masked by share re-purchases forever.

George Gutowski writes from a caveat emptor perspective.

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