Walgreens Boots Alliance, Inc.WBA reported adjusted net earnings of $1.18 per share in the second quarter of fiscal 2015, up 21.6% from the year-ago adjusted number. The adjusted figure also beat the Zacks Consensus Estimate by an impressive 25.5%.
On a reported basis, net earnings came in at $2 billion or $1.93 per share, a significant improvement of 185.2% or 160.8% from the year-ago net earnings of $0.72 billion or 74 cents per share, respectively. A year-over-year double-digit increase in revenues primarily resulted in the bottom-line improvement.
Walgreens Boots (formed from the combination of Walgreen Co. and Alliance Boots GmbH) recorded total sales of $26.6 billion in the second quarter of fiscal 2015, up 35.5% year over year. However, the top line missed the Zacks Consensus Estimate of $27.7 billion.
During the reported quarter, the inclusion of Alliance Boots' sales for January and February was primarily responsible for the impressive top-line growth.
Segment in Details
Post the combination of the two companies on Dec 31, 2014, Walgreens Boots now reports under three operating segments: Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale.
The Retail Pharmacy USA division delivered sales of $21 billion in the second quarter, reflecting an increase of 7.4% from the year-ago period. Within this segment, while total sales in comparable stores increased 6.9%, retail comparable store sales were up 2.5% owing to improved retail product margins on a year-over-year comparison.
Pharmacy sales, which accounted for 64.4% of this division's sales in the quarter, increased 10.1% from the year-ago quarter, while pharmacy sales in comparable stores climbed 9.7%.
The Retail Pharmacy International division delivered sales (comprising the post-merger months of January and February) of $2.0 billion. On a constant exchange rate (CER) basis, comparable store sales in January and February increased 2.9% compared with the same period a year ago.
The Pharmaceutical Wholesale division (comprising the post-merger months of January and February) recorded quarterly sales of $3.9 billion. At CER, sales of this division were relatively flat compared to the year-ago quarter.
Gross profit increased 21.8% year over year to $6.88 billion. However, as expected, adjusted gross margin contracted 290 basis points (bps) to 25.9% driven by lower prescription reimbursement, generic drug inflation and the step down in Medicare Part D rates that came into effect from Jan 1, 2015.
Selling, general and administrative (SG&A) expenses scaled up 22.7% to $5.61 billion. Adjusted operating income increased 30.7% to $1.84 billion driven by strong expense control and efficiencies that outweighed the expected gross profit margin pressure. However, adjusted operating margin contracted 30 bps to 6.9%.
As of Feb 28, 2015, Walgreens Boots' Retail Pharmacy USA division operated 8,232 drugstores across all 50 states, the District of Columbia, Puerto Rico and the US Virgin Islands. The Retail Pharmacy International division operated 4,559 pharmacy-led health and beauty retail stores in eight countries.
Walgreens Boots exited the quarter with cash and cash equivalents of $3 billion, up from $2.6 billion at the end of fiscal 2014. Long-term debt was $16 billion in the reported quarter, compared with $3.7 billion as of Aug 31, 2014.
Moreover, the company has generated operating cash flow of $2.33 billion compared with $1.24 billion in the same period last year.
Fiscal 2015 Guidance
Walgreens expects its adjusted EPS to lie in the range of $3.45 to $3.65 for fiscal 2015. This outlook includes full consolidation of Alliance Boots from Dec 31, 2014 with no lag. The Zacks Consensus Estimate for fiscal 2015 is $3.61, which lies within the company's guidance range. In addition, this assumes quarterly interest expense of $140-$150 million; an effective adjusted tax rate of approximately 29%; an average diluted share count for the fiscal year that is generally consistent with the current quarter; and foreign currency exchange rates that reflect current market rates over the balance of the fiscal year.
Management also reaffirmed its adjusted EPS projection of $4.25 to $4.60 for fiscal 2016. The Zacks Consensus Estimate for fiscal 2016 is $4.39, which lies within the company's guidance range.
In Aug 2014, Walgreens had declared a three-year cost-reduction initiative worth $1.0 billion. Lately, management has identified additional opportunities for cost savings, primarily in its Retail Pharmacy USA division. These additional opportunities will increase the total expected cost savings program by $500 million to a projected $1.5 billion by the end of fiscal 2017. Significant areas of focus include plans to close approximately 200 stores in the U.S.; reorganize corporate and field operations; drive operating efficiencies and streamline information technology and other functions.
Walgreens Boots in its first full quarter earnings release post the completion of the merger, reported a mixed second-quarter fiscal 2015 with earnings comfortably beating the Zacks Consensus Estimate, but the top line missing the mark. Management is concerned about looming headwinds like reimbursement pressure and competition.
There is no doubt that the generic wave in the pharmaceutical industry has been adversely affecting Walgreens' store pharmacy sales, posing a threat to the company's profitability for quite some time now. This is evident from the 290 basis point contraction observed in the combined company's gross margin in the second quarter of fiscal 2015.
Currently, management is focused on improving its operational performance across all segments, reinvesting in the stores of the Retail Pharmacy USA division as well as restructuring the cost base. We are also looking forward to synergies from the Alliance Boots deal in fiscal 2015.
Walgreens currently has a Zacks Rank #4 (Sell). Better-ranked medical products stocks are LeMaitre Vascular, Inc. LMAT , SurModics, Inc. SRDX and Capricor Therapeutics, Inc. CAPR . While LeMaitre and SurModics sport a Zacks Rank #1 (Strong Buy), Capricor Therapeutics holds a Zacks Rank #2 (Buy).