Drug stores expected to close out 2010 on strong note

NEW YORK — Credit Suisse analysts on Monday projected strong front-end sales and improved pharmacy comparisons for December.

“Industry front-end sales growth will accelerate in December on easier comparisons and increased promotional activity,” Credit Suisse research analyst Edward Kelly noted. “Sales last year were negatively impacted by low levels of seasonal inventory (especially at Walgreens) and unusually soft flu activity after an early start to the season,” he added.

Conversely, many retailers have been reversing their SKU rationalization initiatives and early indicators suggest flu activity is on the rise. “The rollout of new promotional programs, like Walgreen’s Jingle Cash initiative, should also drive incremental front-end traffic,” Kelly wrote.

Comparisons in the pharmacy also will ease in December, Kelly suggested. Flu activity currently appears to be tracking in line to above last year based on data from the Centers for Disease Control and Prevention and Google Flu Trends. “We noted that comparisons in the pharmacy become significantly easier in the first half of 2011, and even a mild flu season in upcoming months should provide a tailwind to pharmacy comps,” Kelly surmised.

Kelly estimated that Rite Aid December comps will slip 0.3%, versus an average of -1.3% for the previous three months and consensus of -1%. Pharmacy comps should fall by only 1%, reflecting easier flu comparisons, while front-end same-store sales should increase by 1%. Rite Aid reports monthly sales on Jan. 4.

For Walgreens, which will post December sales on Jan. 5, Kelly projected a 3.5% comps increase, which falls in line with analysts' consensus of 3.4%. “We project a 4.5% front-end comp, well above the 1.5% November gain and 3.1% decline last year,” Kelly wrote, noting that the company’s decision to pull back on holiday inventory penalized sales last year. Kelly expected a 3% gain in pharmacy, an estimate that includes a 1% combined benefit from increased flu activity and flu shots.