It’s been a tough couple of years for drugstore chains. Rite Aid Corporation (NYSE:RAD) was close to bankruptcy in 2012, CVS Caremark Corporation (NYSE:CVS) recently paid $11 million to avoid civil charges due to prescription painkiller issues in its Oklahoma stores, and Walgreen Company (NYSE:WAG) had a battle with pharmacy benefits manager Express Scripts Holding Company (NASDAQ:ESRX) earlier this year. Yet, despite all of this, all three companies reported an increase in earnings in the most recent quarter.
Walgreen Company (NYSE:WAG), likely assuming that investors would be disappointed that the results weren’t better, blamed the sluggish economy. While many analysts say the economy is on the way back, drugstore chains are located in a variety of neighborhoods, including those in low-income areas. Walgreen Company (NYSE:WAG)’s locations in these neighborhoods are showing slower sales, the company says.
Earnings up, shares down
Walgreen’s earnings were up 16% but the fine details of the chain’s earnings call brought shares down. Investors had expected a better result from the expiration of many patents that had once protected drugs like Lipitor from being made into generics. Since generics have a higher profit margin than prescriptions, shareholders expected big results from the change.
The drug retailer reported $624 million in earnings for the quarter, with a 3% increase in revenue, totaling $18.31 billion. Perhaps, the biggest concern for investors is that the sales increase was mostly isolated to the stores’ pharmacies, with front-end store sales sagging. The company’s CEO emphasized the company plans to focus on upping front-end sales in the next quarter through circulars and other promotions aimed at luring customers inside to shop.
Focusing on the positive
Front-end sales were also an issue in competitor CVS Caremark Corporation (NYSE:CVS)’ earnings report. The company’s net income increase of $180 million from a year earlier was largely attributed to the same generic availability Walgreen Company (NYSE:WAG) experienced. But, the good news was that CVS Caremark Corporation (NYSE:CVS)’ front-end sales increased 1.4% year over year in the recent quarter.
CVS’ expectations for the upcoming quarter wasn’t quite as positive, though. The company mentioned the sequestration, leading to spending cuts that will impact Medicare spending on prescriptions for older people. CVS Caremark Corporation (NYSE:CVS) division, which administers benefits for businesses and government agencies, is more closely impacted by changes to healthcare than retail chains.
Rite Aid close behind
Closing in on its competitors is Rite Aid Corporation (NYSE:RAD), once the underdog of the retail drugstore business. The company follows Walgreen and CVS Caremark Corporation (NYSE:CVS) Pharmacy, with $91 million in earnings in its recent quarter. Last year, at the same time, Rite Aid Corporation (NYSE:RAD) had experienced a loss due to a charge of $21 million due to a pending litigation.
Earlier this year, Rite Aid Corporation (NYSE:RAD) had reason for celebration when it logged its first quarterly profit since 2007. This earnings report gave the company its second consecutive quarterly profit, giving investors increased confidence in the chain.
As all three retailers head into the second half of 2013, front-end sales will likely be a priority. Because grocery store chains, Wal-Mart Stores, Inc. (NYSE:WMT), and Target Corporation (NYSE:TGT) all provide the opportunity to pick up prescriptions, consumers see them as a one-stop-shopping experience. What drugstores want is to capture those customers, who will hopefully buy a few extra items while picking up their prescriptions.
How can drugstores compete in this arena? Discounts. With showrooming becoming more prominent than ever, customers can easily see how the milk and bread sold in drugstores compares with the same products at their local grocery stores. Walgreen Company (NYSE:WAG), in particular, has been experimenting with selling its own products, exclusive to its stores, such as its Delish Ice Cream.
Expectations going forward
Walgreen Company (NYSE:WAG), CVS Caremark Corporation (NYSE:CVS), and Rite Aid Corporation (NYSE:RAD) are heading into the summer season with cautious optimism. As they strive to increase front-end sales, will it be enough? Consumers will look at both price and convenience in choosing where to do their shopping, but if past history is any indication, Walgreen will lead and the rest will follow.
The article Is the Economy to Blame for Drugstore Chains’ Poor Earnings? originally appeared on Fool.com and is written by Stephanie Faris.
Stephanie Faris has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Stephanie is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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