Generic drugs online

Source: Barron's

Date: 29-Jul-2008

THE DRUG RETAILERS REPORT JULY SALES within the next two weeks. Rite Aid (ticker: RAD) reports Thursday July 31, Walgreen (WAG) reports Monday, Aug. 4, and Longs Drug Stores (LDG) will publish on Thursday, Aug. 7.

We expect another month of lackluster script growth in July, as IMS month-to-date script volume (through July 18) increased only 0.7%, slightly above the disappointing 0.3% gain in June. Industry growth continues to be penalized by economic weakness, the transition of [branded allergy drug] Zyrtec to over-the-counter, safety concerns on certain drugs, and a general lack of innovation.

We also expect front-end weakness to continue, as the consumer remains challenged and any lingering rebate check benefit should be small. We see limited visibility on these trends improving over the next few months.

We estimate that Walgreen will report a July comp [same-store sales] gain of 4.5% versus 3.4% in June, but essentially all of the sequential improvement should be driven by a calendar shift in pharmacy. Front-end comps are projected to improve 3.5%, in line with recent trends, as the company continues to drive traffic through aggressive promotions. Pharmacy comps are estimated to increase 5.0%, including a 150 basis points benefit from a calendar shift.

We project that Rite Aid will report a flat to up 0.5% comp in July, with a 0.5% gain in pharmacy and a flat comp in the front-end. [Rite Aid subsidiary] Eckerd comps are expected to decline, but improve from June as comparisons ease. We estimate comps will decline about 4% (versus a 6.2% drop in June), driven by a pharmacy decline of 3% (versus negative 5.4% last month) and a front-end decrease of 5% (versus negative 8.1% last month). Core Rite Aid comps are projected to increase 2.0%-2.5% (up 2.5% in pharmacy and up 2% in front-end).

We estimate that Longs will post a July comp decline of 0.5%-1.0%, which would place second-quarter comps below the company's 1%-3% full-year guidance (down 0.4%). Pharmacy comps are expected to decline 1.0%, reflecting the reversal of a 150-200 basis-points June calendar shift and the general malaise seen at the company since the end of last year. Front-end comps are projected to decline 0.5%, driven by the economic weakness in California. Our second-quarter consensus earnings-per-share estimate of 75 cents, which is already below the consensus of 77 cents, could prove to be aggressive.