Walgreen Earnings Disappoint: Is It Time to Reconsider the Stock?

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On Tuesday morning, Walgreen Co. (NYSE:WAG), the second largest retail pharmacy operator, reported earnings that largely disappointed analysts and investors. The stock was weak during morning trade, although it rebounded midday despite an opposite move in the stock market.

Let’s look at the numbers. The company reported revenue of $19.4 billion versus an estimate of $19.44 billion. Despite the miss, the company grew its revenues by about 6 percent for the year. Most of this was due to same store sales growth, which came in at 4.8 percent.

However, what disappointed investors were the company’s weak profit margins. Gross margins fell by 40 basis points to 28.1 percent. This resulted in a 3-cent-per-share miss on EPS, which came in at 91 cents per share excluding extra items.

It may not seem like a big deal that the company missed by just 3 cents per share on earnings, but keep in mind that this means the company is growing by about 4 to 5 percent slower than analysts expected. For a company that trades at about 25 2times earnings, this is a big deal. Furthermore, investors have to keep in mind that when analysts see earnings growth acceleration or deceleration, they extrapolate it into the future.