Same-store sales for Walgreen Co. were down in May, though less than in the previous month, as the company's contract dispute with pharmacy benefit manager Express Scripts Inc. continued to impact its prescription business by double-digits.

Walgreens, same-store sales, May, comparable-store sales, comp-store sales, prescriptions filled, prescription count, pharmacy sales, front end, basket size, customer traffic, Wade Miquelon, Express Scripts, contract dispute, pharmacy benefit manager, PBM, prescription business, third quarter, fiscal 2012, Russell Redman, drug chain, drug stores, BioScrip, OptumRx, Mark Miller, William Blair & Co.

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Walgreens' same-store sales fall as Rx results suffer

June 5th, 2012

DEERFIELD, Ill. – Same-store sales for Walgreen Co. were down in May, though less than in the previous month, as the company's contract dispute with pharmacy benefit manager Express Scripts Inc. continued to impact its prescription business by double-digits.

Walgreens said Tuesday that May comparable-store sales decreased 5.8%, including a 0.8-percentage-point positive impact from calendar day shifts. That marked an improvement from comp-store sales declines of 6.4% in April and 6.8% in March.

In the front end, same-store sales dipped 1% in May. Basket size grew 1.3%, but customer traffic in comparable stores was down 2.3% for the month, according to Walgreens.

Comparable pharmacy sales in May dropped 8.5%, reflecting a positive impact of 1.3 percentage points from calendar day shifts. Walgreens said same-store pharmacy sales also include negative impacts of 3.9 percentage points from generic drug introductions; 0.3 percentage point from the product mix of cough, cold and flu drugs; and 10.8 percentage points from the drug chain no longer being part of the Express Scripts network. Pharmacy sales represented 63.1% of total revenue for the month.

The prescriptions count at comparable stores fell 7.6% in May, despite lifts of 1.3 percentage points from calendar day shifts and 0.1 percentage point from a higher incidence of flu. Walgreens said prescriptions filled during the month were negatively impacted by 10.8 percentage points from the impasse with Express Scripts. The chain added that prescriptions processed by the PBM represented 12.7% of its prescriptions in May 2011.

However, prescription activity excluding the impact of the Express Scripts situation is looking better, according to Wade Miquelon, executive vice president and chief financial officer at Walgreens.

"Since Jan. 1, our underlying trend for number of prescriptions filled has improved," Miquelon said in a statement. "Looking forward, we expect our number of prescriptions filled to be helped as employers and health plans take a variety of steps, ranging from changing prescription benefit managers to changing language in new RFPs to provide continued access to Walgreens and our services.

"In what is the busiest selling season in recent memory, we are pleased that we have continued to receive notification of pharmacy plans regaining access to Walgreens pharmacies with new contracts that become effective throughout the remainder of the year," he noted. "In addition, we extended our multiyear agreement to build on our strategic partnership with OptumRx, one of the largest pharmacy benefit managers in the United States."

Overall revenue in May slipped 1.6% to $5.98 billion from $6.08 billion a year earlier, with sales up 0.3% in the front and down 3.9% in the pharmacy. 

"We believe the improvement in the underlying script growth trend was aided this month by the $25 gift card promotion for consumers who transfer their prescriptions to Walgreens," analyst Mark Miller of William Blair & Co. wrote in a research note released Tuesday.

"The one-month promotion (ending June 16) is running in 10 large Express Scripts markets (including St. Louis, Chicago, Phoenix, Houston, and Miami) and is targeted at non-Express Scripts customers who might be experiencing longer wait times at competitors’ pharmacies," he explained. "Assuming some lag time for consumer utilization of the promotion, we estimate the script lift for June likely will be larger than during May."

Miller estimated the loss of front-end traffic related to the Express Scripts impasse at 1% to 2%, which was one factor behind the dip in front-end same-store sales for May.

"We believe the larger factor remains the change in ad circular strategy, which we believe affected front-end comps by 2% to 3%," he said in his report. "Management confirms that the percentage of sales on ad is down year to year, as the company pursues its strategy to reposition the front end around 'health and daily living,' and our independent analysis of weekly ad circulars indicates that prices on identical promoted items are up roughly 15% year to year (i.e., promoted less heavily). We perceive that most analysts will attribute front-end sales weakness to the PBM conflict, but if our independent analysis correctly depicts the promotion change, we estimate front-end gross profits are increasing by at least a low single-digit rate on a comp-store sales basis."

Walgreens reported third-quarter sales of $17.77 billion, down 3.3% year over year. Same-store sales in the quarter fell 6.5, reflecting declines of 0.7% in the front end and 9.8% in the pharmacy. Prescriptions filled at comparable stores sank 9% for the quarter.

Calendar year-to-date sales came in at $29.43 billion, up 2.2%, while revenue for the first nine months of fiscal 2012 edged up 0.7% to $54.57 billion.

During May, Walgreens opened seven drug stores, including one relocation, and acquired 28 community pharmacies from BioScrip Inc.

Walgreens said that as of May 31, it operated 7,889 drug stores, 175 more than a year ago, including 48 stores acquired over the last 12 months.

*Editor's Note: Article updated with analyst comment.