Technology

Walgreens Boots (WBA) Q2 Earnings Lag Estimates, Margins Down

Walgreens Boots Alliance, Inc. WBA reported adjusted earnings per share (EPS) of $1.64 for second-quarter fiscal 2019, down 5.4% year over year (down 4.3% at constant exchange rate or CER). The figure missed the Zacks Consensus Estimate of $1.70 by 3.5%.

On a reported basis, net earnings came in at $1.16 billion, reflecting a 14.1% decline from the prior-year quarter. Reported EPS came in at $1.24, down 8.3% on a year-over-year basis.

Per management, a difficult macroeconomic environment and market challenges made fiscal second quarter the toughest since the formation of the Walgreens Boots Alliance.

Total Sales

Walgreens Boots recorded total sales of $34.53 billion in the fiscal second quarter, up 4.6% year over year and 6.7% at constant exchange rate or CER. The top line missed the Zacks Consensus Estimate of $34.87 billion.

Segments in Detail

Walgreens Boots reports through three segments: Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale.

Walgreens Boots Alliance, Inc. Price, Consensus and EPS Surprise

 

Walgreens Boots Alliance, Inc. Price, Consensus and EPS Surprise | Walgreens Boots Alliance, Inc. Quote

Retail Pharmacy USA

The segment recorded sales of $26.3 billion in the second quarter, highlighting an improvement of 7.3% year over year. Excluding benefits from the acquired Rite Aid stores, organic sales growth was 1.6% year over year.

Pharmacy sales, which accounted for 71.9% of the Retail Pharmacy USA division’s sales in the quarter, increased 9.8% from the year-ago quarter on higher prescription volume from the acquisition of Rite Aid stores and central specialty. Pharmacy sales at comparable stores improved 1.9% while prescriptions filled in comparable stores increased 1.8% year over year in the quarter. With the addition of Rite Aid stores, retail sales increased 1.3% year over year. However, comparable retail sales dropped 3.8%.

Retail Pharmacy International

Revenues at the Retail Pharmacy International division dropped 7.1% on a year-over-year basis to $3.1 billion in the second quarter. Sales were down 1.2% at CER considering a 1.3% decline in Boots UK.

In the United Kingdom, comparable pharmacy sales dropped 1.5% and comparable retail sales declined 2.3% in the reported quarter.

Pharmaceutical Wholesale

The Pharmaceutical Wholesale division recorded quarterly sales of $5.7 billion, down 0.3% year over year (up 9.1% at CER banking on continued growth in emerging markets and the U.K.).

Margins

Gross profit in the reported quarter declined 4.3% year over year to $7.75 billion. However, gross margin contracted 210 basis points (bps) to 22.4%.

Selling, general and administrative (SG&A) expenses remained relatively flat year over year at $6.32 billion. Adjusted operating income after excluding equity earnings in AmerisourceBergen declined 19.7% to $1.43 billion. Overall, operating margin contracted 130 bps to 4.1%.

Financial Condition

Walgreens Boots exited the fiscal second quarter with cash and cash equivalents of $818 million, compared with $980 million at the end of first-quarter fiscal 2019. Long-term debt was $12.69 billion, compared with $11.65 billion at the end of fiscal first quarter. In the six months ending Feb 28, 2019, the company generated operating cash flow of $1.20 billion compared with $3.21 billion in the year-ago period.

Guidance Tweaked

Walgreens Boots lowered its fiscal 2019 adjusted EPS guidance from 7-12% growth at CER to roughly flat. The Zacks Consensus Estimate for the metric is pegged at $6.39.

The company had announced the introduction of a transformational cost management program in the last-reported quarter. Walgreens Boots has now revised the targeted annual cost savings to more than $1.5 billion from more than $1 billion by fiscal 2022.

Our Take

Walgreens Boots reported disappointing second-quarter results largely due to turbulence in the U.S. and UK consumer markets, lower generic deflation and reimbursement pressure. The lowered fiscal 2019 adjusted EPS growth projections at CER is also disappointing.

Overall, the Retail Pharmacy USA division witnessed comparable prescription growth and benefited from a strong retail prescription market. Within this segment, Walgreens Boots has been making good progress on account of increasing prescription volumes. Meanwhile, tough market conditions, particularly in retail, have been leading to sluggishness in the Retail Pharmacy International division. However, Walgreens Boots is taking steps to accelerate the digitalization and transformation of its business.

Zacks Rank & Key Picks

Walgreens currently carries a Zacks Rank #4 (Sell).

A few better-ranked stocks in the broader medical space are Penumbra, Inc. PEN, Amedisys, Inc. AMED and ResMed Inc. RMD.

Penumbra’s long-term earnings growth rate is expected at 20.9%. The stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Amedisys’ long-term earnings growth rate is projected at 19.8%. The stock carries a Zacks Rank #2.

ResMed’s long-term earnings growth rate is estimated at 10.6%. The stock also carries a Zacks Rank of 2.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.