) reported adjusted net earnings of 72 cents per share in the
first quarter of fiscal 2014, a 24.1% improvement from the
year-ago adjusted net earnings. However, earnings were in line
with the Zacks Consensus Estimate.
The adjustments include negative impacts of
acquisition-related amortization and other costs, the quarter's
LIFO provision and Alliance Boots-related tax, and positive
impacts of fair value adjustments and amortization related to
Walgreens' warrants to purchase
) common stock. Morever, implementation of new initiatives in the
fiscal 2014 first quarter resulted in an adverse impact of 2
cents per share.
On a reported basis, earnings came in at $695 million or 72
cents per share, up 68.3% or 66.1% year over year respectively.
Both reported and adjusted net income in the quarter include the
positive impact of 7 cents per share of a deferred tax adjustment
resulting from a reduction to the U.K. corporate tax rate
applicable to Alliance Boots (enacted in July 2013).
Walgreens' sales came in at $18,321 million in the quarter, up
5.9% year over year and marginally ahead of the Zacks Consensus
Estimate of $18,309 million.
Quarter in Detail
Front-end comparable store (those open for at least a year)
sales and basket size grew 2.4% and 2.2%, respectively, in the
quarter. On the other hand, customer traffic in comparable stores
inched up 0.2%. Overall, comparable store sales improved
Prescription sales (accounting for 64.7% of sales in the
quarter) climbed 7.3% from the prior-year quarter, while
prescription sales in comparable stores increased 7.2%. Moreover,
Walgreens filled 213 million prescriptions (up 5.8% year over
year) during the reported quarter.
As reported by IMS Health, prescription growth rate of
Walgreens' exceeded that of the rest of the industry by 2.9%.
Prescriptions filled at comparable stores grew 5.5%. Walgreens'
market share in retail pharmacy improved 50 basis points (bps) to
19.4% in the quarter.
Gross profit increased 1.04% year over year to $5.15 billion.
However, gross margin contracted 134 bps to 28.1% on the back of
fewer new generic drugs introduction, soft margin in front-end
sales as the company made meaningful promotional investments to
drive store traffic. The LIFO provision was $58 million in this
year's first quarter versus $55 million last year.
Selling, general and administrative (SG&A) expenses
declined 0.4% to $4.4 billion. Operating margin expanded 97 bps
The company opened/acquired 84 stores in the reported quarter
compared with 128 stores in the year-ago quarter. As of Nov 30,
2013, the company operated in 8,681 locations in 50 states, the
District of Columbia, Puerto Rico and Guam, including 8,200
drugstores (142 more compared with the year-ago period). The
company also operates worksite health and wellness centers,
infusion and respiratory service facilities, specialty
pharmacies, mail service facilities, and e-commerce business.
Walgreen exited the first quarter with cash and cash
equivalents of $969 million, significantly lower than $1.8
billion as of Nov 30, 2012. Long-term debt was higher at $4.5
billion in the reported quarter, compared with $5.0 billion as of
Nov 30, 2012.
Moreover, the company has generated operating cash flow of
$133 million in the quarter compared with $601 million in the
same period last year.
Second Quarter Stance
In the second quarter, Walgreens plans to balance its
front-end sales and margin. The company foresees the impact of
generic wave on pharmacy margin similar to what it has been in
the first quarter of the fiscal. However, the company expects
this effect to keep on moderating through the rest of the
fiscal. Additionally, the company plans to focus on expense
management to tackle the challenging environment.
Strides on Synergy Track
Walgreens' partnership with Alliance Boots is yielding
positive results, with combined first-quarter 2014 synergies of
$107 million. The Alliance Boots deal was accretive to adjusted
earnings by 14 cents including 7 cents attributable to the
deferred tax adjustment. The company estimates that accretion
from Alliance Boots in the second quarter will be an adjusted 7
to 8 cents per share.
Walgreens and Alliance Boots' strategic long-term relationship
with AmerisourceBergenis also moving ahead, with Walgreens and
AmerisourceBergen implementing their 10-year agreement for
pharmaceutical distribution last quarter. Moreover, several of
Boots' product brands were launched across Walgreens stores in
the Phoenix market.
In the fourth quarter of fiscal 2013, Walgreens and Theranos,
Inc. had entered into a long-term partnership, whereby the new
lab testing service of the latter will be available throughout
the wide network of Walgreens' pharmacies. In the reported
quarter, Walgreens initiated the national rollout of Theranos
Wellness Centers by opening two new centers at Walgreens stores
in the Phoenix area.
Walgreens currently has a Zacks Rank #3 (Hold). While we
choose to remain on the sidelines regarding WAG, drug retailers
CVS Caremark Corp.
) carrying a Zacks Rank #2 (Buy), are worth considering.
AMERISOURCEBRGN (ABC): Free Stock Analysis
CVS CAREMARK CP (CVS): Free Stock Analysis
WALGREEN CO (WAG): Free Stock Analysis Report
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