Walgreen Down On An Up Day

While most attention is on record highs today, there are stocks that are seeing significant losses. The biggest decliner on the Standard & Poor’s 500 index not named J.C. Penney (JCP) (down 9%) is Walgreen (WAG), down more than 3.5% after reporting disappointing February same-store sales.

I’ll have more on Penney in a later post, but for now, Walgreen.

Walgreen reported a 4.3% drop in same-store sales last month due in part to an extra day in the year-earlier period, while sales edged down during the full second quarter.

The drug-store chain said on Tuesday its sales totaled $18.63 billion, down 0.1%, for the quarter ended Feb. 28. The results missed Wall Street�s view of $18.93 billion.

Excluding last year�s leap day, comparable store sales declined a narrower 0.6% and pharmacy sales at stores open more than a year remained level. Prescriptions filled at those stores climbed 6.5%.

February�s front-end comparable store sales fell 1.4% as demand for flu-related products began to ease last month.

Those figures mostly came in below consensus estimates, hence today’s drop. And Ross Muken at ISI Group certainly sees reasons to worry:

In the front end, the company continued to see weaker foot traffic, down (4.9%). We expect a continued soft trend in foot traffic (relative to peers) to plague WAG in the early part of the coming year as discounters, dollar stores, and other drug stores (CVS/RAD) continue to take/retain share and retailers broadly feel the impact of higher payroll taxes (should be less harmful to WAG comps given a less price sensitive customer base but still a possible drag at the margin)…Cautious as foot traffic continues to point negatively and we await increased clarity on [UK-based pharmacy and strategic partner] Alliance Boots performance and synergies. Valuation also continues to be challenging as the company is now trading at ~9x current EBITDA�and ~8x forward when adjusting for the PF Boots debt (not yet consolidated into the capital structure, although results do benefit from the income associated with AB).

On the other hand, and flying in the face of today’s market reaction, John Heinbockel at Guggenheim reiterated his Buy rating for Walgreen stock.

WAG’s Feb. sales were below our expectations, mainly due to the lack of a flu/cold benefit and poor sell-through of seasonal merchandise. That said, we would remain buyers of WAG shares, as we expect EPS growth to resume and beat expectations, driving improved sentiment in the name and further upside potential in the shares…

Bottom line: we remain bullish on WAG and expect above-consensus 2Q 2013 results on March 25 to drive further upside in the shares. Our $0.99 estimate is well above the Street’s $0.94 driven by a greater-than-expected generic benefit and $0.06 of accretion from the equity investment in Alliance Boots.