Friday, April 06, 2007

The Egg Tree

At Easter time there is a long standing tradition of decorating leafless trees with eggs. Eggs, of course, symbolize rebirth, renewal and resurrection. Variations of the theme can be found in German, Eastern Europe and Russia. The practice was transported to the U.S. around Civil War time.

Only the handiest of crafters attempt real egg trees. It is a lot of work to blow out and then paint the fragile shells. In pre-television and radio times, whole families worked on the egg tree project for weeks before Easter. Now egg trees are made to appear in the family room with the help of express mail delivery after a few clicks of the mouse in the Internet browser.

Indeed, Easter is the third most significant holiday for retail sales in the U.S. - behind Christmas and Valentines Day. According to the National Retail Federation, this year Easter holiday sales are expected to increase at least 10% over 2006 sales to $14.3 billion. I can personally attest to a good portion of that increase. Three small, plain Easter cards for my mother and two friends rang up at $9.96.

That was a CVS Pharmacy purchase to those who would use greeting card prices as an investment indicator. Its shares have shown remarkable strength in the last four months, closing at $34.59 before the holiday after hitting a 52-week low of $27.19 in early December 2006. Of course, CVS just completed the $26.5 billion acquisition of Caremark, a pharmacy benefits manager, and is now called
CVS/Caremark Corp. (CVS: NYSE).

Other drug store chains have not been left behind. Shares of
Rite Aid Corporation (RAD: NYSE) and Longs Drug Stores (LDG: NYSE) have surged upward since the beginning of the year. Rite Aid has been acquisitive also and has plans to buy U.S. Eckerd and Brooks chains.

In contrast,
Walgreens (WAG: NYSE) has been a laggard in the drug chain group and its greeting cards are comparatively priced! More importantly Walgreen’s same-store sales in March 2007 rose 8% and total March sales increased 13%. Walgreens shares experienced the same later 2006 resurgence but have failed to keep pace with the rest of the group. This is largely due to its concentration on smaller “tuck-in” acquisitions that have not excited Wall Street like the CVS foray into the PBM market.

The drug store success notwithstanding, Wall Street has been nervous about consumer spending for sometime. As the March quarter and April same-store sales get reported in the coming weeks, we find out whether the drug retailers and the U.S. economy is experiencing it own renewal.

The author of the Small Cap Copy web log owns shares of WAG but has no other beneficial interest in the companies mentioned herein.

No comments: