Credit Suisse: Rising gas prices may rev drug engine

Drug channel could capitalize on rising costs/fuel prices

NEW YORK — Drug stores may be best positioned to navigate any headwinds whipped up by rising fuel costs and may even benefit from them, a Credit Suisse analysis published Friday found.

“We expect the industry to fully pass through front-end inflation and see no material impact from higher gas prices,” wrote Credit Suisse research analyst Ed Kelly. “Consequently, we remain positive on the drug stores and view the group as one of the most attractive sectors in retail today. [The channel] provides insulation from inflationary headwinds, possesses a unique industry catalyst in the 2012 generic wave, [CVS Caremark and Walgreens] have company-specific drivers of upside, and valuations are still reasonable.”

As a channel, drug stores have been most successful in passing through product cost inflation, especially considering the weak relationship between price and volume at drug stores vs. supermarkets or overall retail, Kelly wrote. “In other words, drug stores historically have passed through inflation without a meaningful decline in volume. We attribute this success to the fact that the industry competes on convenience more than price, has a natural flow of pharmacy traffic and has a low average ticket.”

Kelly noted that Walgreens’ front-end comps have either been stable or actually accelerated during each of the last five spikes in gas prices, including the 2008 summer peak above $4 per gallon.

Credit Suisse is projecting a conservative 2.5% front-end same-store sales growth across both CVS and Walgreens, though comparable-store sales growth of between 3% and 5% front-end comps wouldn’t be out of the question, Kelly added.

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