) reported adjusted net earnings of 91 cents per share in the third
quarter of fiscal 2014, up 7.1% from the year-ago adjusted number.
However, adjusted earnings fell below the Zacks Consensus Estimate
of 94 cents. On a reported basis, earnings came in at $722 million
or 75 cents per share, up 15.7% or 15.4% year over year,
Walgreens' sales came in at $19,401 million in the quarter, up
5.9% year over year and marginally ahead of the Zacks Consensus
Estimate of $19,384 million.
Quarter in Detail
Front-end comparable store (those open for at least a year)
sales and basket size grew 2.2% and 2.9%, respectively, in the
quarter. On the other hand, customer traffic in comparable stores
was down 0.7%. Overall, comparable store sales improved 4.8%.
Prescription sales (accounting for 64.4% of total sales in the
quarter) climbed 8.4% over the prior-year quarter, while
prescription sales in comparable stores increased 6.3%. Moreover,
Walgreens filled 218 million prescriptions (up 4.5% year over year)
during the reported quarter.
Prescriptions filled at comparable stores rose 4.1%. As reported
by IMS Health, Walgreens' market share in retail pharmacy improved
20 basis points (bps) to 19.0% at the end of May 2014.
In addition, prescriptions filled for Medicare Part D patients
witnessed a solid growth of 11.6% in the reported quarter. Also, in
May, Part D market share increased 60 bps from the year-ago
The company's Balance Rewards loyalty program reached 81 million
active members at the end of the third quarter.
Gross profit increased 4.2% year over year to $5.44 billion.
However, gross margin contracted 48 bps to 28.0% as pharmacy gross
profit were negatively impacted by lower third-party reimbursement,
fewer brand-to-generic drug conversions and generic drug price
inflation. However, as expected, both pharmacy and front-end
margins were aided from purchasing synergies from the company's
joint venture with Alliance Boots. The LIFO provision was $41
million in this fiscal's third quarter versus $120 million last
Selling, general and administrative (SG&A) expenses scaled
up 4.3% to $4.6 billion. Operating margin contracted 11 bps to
The company opened/acquired 39 stores in the reported quarter
in-line with the year-ago quarter numbers. As of May 31, 2014, the
company operated in 8,683 locations in 50 states, the District of
Columbia, Puerto Rico and Guam and the U.S. Virgin Islands,
including 8,217 drugstores (120 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, e-commerce business and Take
Care Health Systems.
Walgreens exited the third quarter with cash and cash
equivalents of $1.13 billion, significantly lower than $2.99
billion as of May 31, 2013. Long-term debt was $3.8 billion in the
reported quarter, compared with $6.3 billion as of May 31,
Moreover, the company has generated year-to-date operating cash
flow of $2.51 billion in the quarter compared with $3.18 billion in
the same period last year.
Boot Deal Update
While moving into the second step of the Walgreens-Alliance
Boots strategic transaction, Walgreens is currently suspending its
fiscal 2016 goals that were announced in 2012. As a result of many
step two considerations and current business performance, the
company is planning to hold an investor call, which is expected to
take place by late July or early August 2014 where it will provide
a new set of targets for fiscal 2016.
So far, Walgreens' partnership with Alliance Boots is yielding
positive results, with combined year-to-date synergies of $367
million. The company expects second-year combined synergy program
in the range of $400-$450 million, an increase from the previous
second-year estimate of $375-$425 million.
In the third quarter, the Alliance Boots deal was accretive to
adjusted earnings by 15 cents. The company estimates that accretion
from Alliance Boots in the fourth quarter will be an adjusted 6 to
7 cents per share.
Walgreens reported a mixed fiscal third quarter with a bottom
line miss and a marginal beat on the top-line front. The generic
wave in the pharmaceutical industry remains a threat to revenues.
This is also reflected in the company's quarterly sales figure.
Nonetheless, Walgreens is poised to generate higher profits from
escalating sales of higher-margin generic drugs. The company is
also positioned on a healthy dividend growth track. Further, the
customer loyalty program is gaining traction as reflected in
increasing registrations. This should improve customer traffic for
Walgreens going forward.
Moving into the second phase of the Walgreens-Alliance Boots
strategic transaction, the company suspended its earlier provided
fiscal 2016 guidance. We are waiting for the company's updated
guidance on the same, which is expected by late July or early
August. Till then we prefer to remain on the sidelines.
Walgreens currently has a Zacks Rank #3 (Hold). While we choose
to remain on the sidelines regarding WAG at present, stocks worth
considering in the broader medical sector are
ICU Medical, Inc.
Globus Medical, Inc.
). All the three stocks hold a Zacks Rank #2 (Buy).
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