June 2009

I own drugstore stocks. I actually own all three because I wanted my IRA set up as a hedge against the recession, and that strategy has pretty much worked because my IRAs are now where they were a year or so ago. I once read that you should invest in what you know, so I took that advice and bought the drug stores, P&G and a few other food and H&BA manufacturers. I have wanted Johnson and Johnson for a looooooong time and when it dipped six months ago I got greedy and thought I’d wait a little while longer until it dipped lower. Since that time their stock is up 19% so that ship has sailed.

While reading around the net trying to figure out why Rite Aid was up 16% today (I don’t get too excited, that translates to 21¢ and they were up because of debt restructuring so they are in business until at least 2012), I found this interesting article about drug store profits. I wish it had listed pharmacy profits not just percentage of pharmacy sales at the store. I’ve always read that profits in the pharmacy run at about 80% of the stores overall profit and the front of the store exists to get people in the store… to use the pharmacy. I’d love to know if that is still true or close to true.

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Link to article

Drugstore Demand Shows No Sign of Slowing

With consolidation over the past few years, it has become a 3-horse race for pharmacy dominance. This week, we got a peak into the health of the drugstore retail sector as Walgreens (WAG) and Rite Aid (RAD) reported quarterly earnings.

Walgreens has the largest retail network in the US, with 7,361 stores including 6,857 drugstores as well as worksite health centers, home care facilities and specialty, institutional and mail service pharmacies. With an unbelievable track record of consistent performance – 34 straight years of record sales and earnings – they have long been known for their conservative culture, profitability and organic growth. While growth has slowed somewhat during the recession, their long term results are extremely impressive (article shows chart)

In the fiscal 3rd quarter of 2009, the company reported net sales growth of 8% to $16.21 Billion and a same-store sales increase of 2.8%, while earnings were down 8.7% over the prior year to $522 Million. Front-end same store sales were up 0.9% and pharmacy comparable sales increased 3.8%. The company has been long accustomed to posting consistent double-digit top and bottom line gains, so it’s certainly surprising to see 3 straight quarterly earnings declines (article shows another chart)

Commenting on the results, CEO Gregory Wasson said “In the third quarter, we posted solid results in a difficult economy while recording significant restructuring costs.” They are focused on three core strategies intended to help them return to double-digit earnings growth: leveraging the largest store network in America, enhancing the customer experience, and implementing major cost reductions and productivity gains.

For the 1st quarter of fiscal 2010, Rite Aid reported that total net sales decreased 1.2% from the prior year to $6.531 Billion. Comparable same-store sales were up 0.6%, driven by a 1.6% increase in pharmacy same-store sales, while front-end same-store sales decreased by 1.6%. The company posted a loss of $98.4 Million (0.11 diluted EPS), which was a significant improvement from the $156.6 Million loss in the prior period. (article shows a chart)

More importantly, the company made significant progress on the debt front. On the conference call, CEO Mary Sammaons explained:

Rite Aid closed 86 stores during the quarter and had 179 fewer stores than the year-ago period. The sales decline was primarily driven by the reduction in store count, while soft front-end sales also contributed. Overall store count has been steadily declining since the purchase of Eckerd stores (article shows another chart)

While continuing to focus on balance sheet liquidity, the steps it has already taken will enable it to concentrate more on improving inventory efficiencies, as well as customer loyalty through programs such as the RX Savings card program. Card enrollment has grown from 1.7 million to 2.6 million users in just the past 3 months.

Like all retailers, the drugstore segment is facing strong headwinds from a frugal consumer in a tough recessionary environment. Pharmacy demand shows no signs of slowing down, and because of the convenience factor front-end sales will continue to help drive sales gains going forward. Both Walgreen and Rite Aid spoke of health care costs and regulatory reform on the conference calls, and this will certainly play a large part in shaping the industry for the foreseeable future. For retail drugstore companies, the only thing that stays the same is everything is always changing.

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