Walgreen Co. and Rite Aid Corp. continued their same-store sales resurgence in May, which industry analysts said could herald improving results for the drug store sector overall.

Walgreens, Rite Aid, same-store sales, May, comparable-store sales, Russell Redman, comp-store sales, pharmacy, front end, prescriptions, Ed Kelly, Credit Suisse, Mark Miller, William Blair & Co., Pharmacy same-store sales, Duane Reade, drug store

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Same-store sales trending upward

June 27th, 2011

NEW YORK – Walgreen Co. and Rite Aid Corp. continued their same-store sales resurgence in May, which industry analysts said could herald improving results for the drug store sector overall.

At Walgreens, comparable-store sales climbed 5.6% year over year in May, up from a 3.4% increase in April and marking the chain’s second-largest comparable-store gain this year after a 6.1% rise in January. The company has seen an upward trend in monthly same-store results since a 1.3% decline in October.

Rite Aid, meanwhile, reported a 1.3% rise in same-store sales for May, topping a 0.5% uptick in April. Except for virtually flat results in March, the retailer has seen same-store increases every month since December. Before then, it hadn’t posted a monthly gain since May 2009.

Both Walgreens and Rite Aid saw same-store sales edge up in the front end as well as in the pharmacy last month.

“Front-end trends should continue to improve. We believe the recent recovery in front-end sales continued in May, driven by accelerating inflation and a slowly improving consumer,” Credit Suisse analyst Ed Kelly wrote in a research note. “Drug stores have been successfully passing on higher prices for several months without much impact to volumes.

“We expect sales to continue to improve throughout the year as cost inflation accelerates.”
Pharmacy same-store sales overcame some negative factors during the month. “Pharmacy comps remained solid in May, despite cycling out of easy year-over-year flu comparisons and the recent switch of Allegra to OTC,” Kelly said. “This dynamic is being driven by ongoing inflation on branded drugs and a temporary lull in new generic launches. Underlying script growth should remain lackluster, as flu activity has decelerated.”

Walgreens noted that calendar day shifts helped lift May same-store sales by 1.1 percentage points. And as of May 1, Duane Reade stores are now included in its same-store results.

In the front end, Walgreens’ same-store sales rose 3.6% in May. Customer traffic in comparable stores increased 1.6%, and basket size grew 2%.

Pharmacy same-store sales were up 6.7% for the month, with calendar day shifts providing a lift of 1.7 percentage points and generic drug introductions having a negative impact of 1.8 percentage points. Prescriptions filled at comparable stores increased 7.1%, with a positive impact of 1.7 percentage points from calendar day shifts.

Analyst Mark Miller of William Blair & Co. noted that Walgreens’ 5.6% overall comp-store sales gain in May beat Wall Street’s consensus forecast for a 4.2% increase. “The shift of Allegra to OTC status hurt pharmacy comps by 25 basis points. The drag from new generics continued to moderate in May (180 basis points) versus April (190 basis points), consistent with our expectations,” he wrote in an analysis of Walgreens’ May sales.

“Beer and wine added 55 basis points to the front-end comp, a modest deceleration from prior trends as Walgreens approaches the anniversary of the category rollout,” Miller said. “Allegra added 20 basis points, and we understand that the OTC allergy category is comping at a solid double-digit rate, helped by this spring’s rainy weather.

“Management noted that promotional activity has picked up recently across all retail channels, likely in response to falling consumer confidence after the recent spike in gasoline prices to $4 per gallon,” he added.

At Rite Aid, same-store sales for the five weeks ended May 28 rose 1.8% in the front end and 1% in the pharmacy.

The company said that pharmacy comparable-store results reflect a 129-basis-point negative impact from generic drug introductions. Prescription counts at comparable stores inched up 0.1% over the prior-year period.

“Rite Aid’s May sales exceeded consensus and our estimates on stronger-than-expected front-end results,” Credit Suisse’s Kelly observed. “Total comps improved 1.3% versus our estimate of 1% and the consensus of 0.5%. The front-end comp accelerated to 1.8%, driven by a pickup in allergy, late Easter clearance (one day shifted into May), and easy year-over-year comparisons. The pharmacy comp rose 1%, consistent with recent trends, driven by ongoing drug price inflation.”