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Merrill Lowers Duane Reade to 'Sell'

Merrill Lynch downgraded Duane Reade (DRD) to sell, from neutral.

Analyst Monica Aggarwal says she was perplexed by Duane Reade's most recent extensive reduction in forecasts. She says she had been hoping heavy gross margin erosion of the fourth quarter of 2002 was be behind company as front-end sales began to somewhat stabilize. Aggarwal says the model already had caution built in as she thought management guidance on a second-quarter call was overoptimistic.

However, front-end comparison at -1.1%, vs. her flat expectation, have huge detrimental impact on gross margins given the heavy reliance on this end of the business. She sees very little to be optimistic about. Aggarwal cut her 78 cents 2003 earnings per share estimate to 55 cents, and trimmed the $1.15 2004 estimate to 70 cents.

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