Walgreens Discusses Growth Strategy - Analyst Blog

By Zacks | January 14, 2013 AAA

Recently, Walgreens (WAG) debriefed the investors on its growth strategy for fiscal 2013, while discussing the current business environment and providing a recap of its performance in fiscal 2012.

Fiscal 2012 Recap

Despite a challenging year, Walgreens attained several milestones in fiscal 2012. The company made tuck-in acquisitions and forged a strategic partnership with Alliance Boots. Further, Walgreens launched its Balance Rewards loyalty program in September 2012, which has recorded more than 50 million registrations to date.

The company generated record cash flow from operations of $4.4 billion in fiscal 2012 out of which $1.9 billion was returned back to its shareholders via stock repurchases and dividends. The payment of the largest quarterly dividend in the company's history was another takeaway in the fiscal.

By adopting appropriate strategies, Walgreens was also able to convert its fiscal 2012 headwinds into tailwinds for the ongoing fiscal. Among these, the most important turnaround is the new multi-year pharmacy network agreement with pharmacy benefit manager Express Scripts (ESRX) (from September 2012), under which the company's pharmacy network has started filling prescriptions from Express Scripts customers.

Growth Drivers for 2013 and Beyond

The company's three-pronged strategy of providing a holistic Well Experience, improving the role of community pharmacy, and forging strategic alliances is likely to yield positive results. Notably, the company has left no stone unturned to bolster sales, ranging from a customer loyalty program to stimulate consumer demand to resorting to inorganic means.

In order to supplement its Well Experience approach, Walgreens continues to enhance its products and services. Moreover, the company is currently investing in private brands such as Walgreens, Delish and Nice! among others.

Furthermore, Walgreens is the largest provider of vaccinations and immunizations in the U.S., with respect to community pharmacy. As per management, about 70% Americans are without a primary care physician and over 30 million of the U.S. population will gain insurance coverage in 2014 under the health care reforms. Consequently, revenue contribution from this franchise is expected to be more significant.

The strategic alliance with Alliance Boots has also allowed Walgreens to expand its worldwide foothold, especially in Europe. The company believes that the wholesale business of Alliance Boots should improve its supply-chain performance. Also worth mentioning in this context is Walgreens' increasing focus on emerging markets as the pharmaceutical sector in these markets present significant growth opportunities.

Our Take

The recent developments regarding Walgreens continues to display its strength in pursuing strategic initiatives as reflected in the bullish momentum of its stock price. The stock inched towards its 52-week high of $39.21 on January 11, 2013.

Following its annual shareholders' meeting, estimate revision trends also reflect a bullish sentiment toward Walgreens over the last 7 days. The positive revisions in the Zacks Consensus Estimate for fiscal 2013 as well as fiscal 2014 underline these events.

While fiscal 2012 was a challenging year for Walgreens, we look forward to fiscal 2013 with sublime optimism. We currently have a long-term Neutral recommendation on the stock which carries a Zacks Rank #3 (Hold). Its peers Rite Aid Corporation (RAD) carries a Zacks Rank #1 (Strong Buy) and CVS Caremark (CVS) carries a Zacks Rank #2 (Buy).
 

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