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Walgreens (WBA) Q1 Earnings Top Estimates, Margins Down

Walgreens Boots Alliance, Inc.WBA reported adjusted earnings per share (EPS) of $1.46 for first-quarter fiscal 2019, up 14.1% year over year (same at constant exchange rate or CER). The figure surpassed the Zacks Consensus Estimate of $1.43.

On a reported basis, net earnings came in at $1.12 billion, reflecting an 36.8% surge from the prior-year quarter. Reported EPS came in at $1.18, up 45.7% on a year-over-year basis.

Total Sales

Walgreens Boots recorded total sales of $33.79 billion in the fiscal first quarter, up 9.9% year over year and up 11.4% at constant exchange rate or CER. The top line exceeded the Zacks Consensus Estimate of $33.58 billion.

Segments in Detail

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

Retail Pharmacy USA

The segment recorded sales of $25.7 billion in the first quarter, highlighting an improvement of 14.4% year over year. Excluding the benefit from acquired Rite Aid stores, organic sales growth was 4.6% year over year.

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

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

Pharmacy sales, which accounted for 74.4% of the Retail Pharmacy USA division's sales in the quarter, increased 17.5% 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 2.8% while prescriptions filled in comparable stores increased 2% year over year in the quarter. With the addition of Rite Aid stores, retail sales increased 8.3% year over year. However, comparable retail sales dropped 3.2%.

Retail Pharmacy International

Revenues at the Retail Pharmacy International division dropped 5.9% on a year-over-year basis to $2.9 billion in the first quarter. Sales were down 3.6% at CER considering the negative impacts of the divestiture of Boots Contract Manufacturing in the prior year quarter and a change in loyalty accounting. In the United Kingdom, comparable pharmacy sales dropped 3.5% and comparable retail sales decreased 2.6% in the reported quarter.

Pharmaceutical Wholesale

The Pharmaceutical Wholesale division recorded quarterly sales of $5.7 billion, down 0.2% year over year (up 6.6% at CER banking on continued strong growth in emerging markets).

Margins

Gross profit in the reported quarter increased 4.1% year over year to $7.64 billion. However, gross margin contracted 127 basis points (bps) to 22.6%.

Selling, general and administrative (SG&A) expenses increased 6.3% year over year to $6.3 billion. Adjusted operating income declined 4.9% to $1.4 billion. Overall, operating margin contracted 63 bps to 4%.

Financial Condition

Walgreens Boots exited the fiscal first quarter with cash and cash equivalents of $980 million, compared with $785 million at the end of fiscal 2018. Long-term debt was $11.64 billion, compared with $12.43 billion at the end of fiscal 2018. In the first quarter, the company generated operating cash flow of $460 million compared with $1 billion a year ago.

Guidance

Walgreens Boots maintained its fiscal 2019 adjusted EPS guidance in the range of $6.40 to $6.70 (a 7% to 12% growth at CER). The Zacks Consensus Estimate of $6.53 per share is within the guided range.

The company has also announced the launch of a new transformational cost management program, which is targeting annual cost savings of more than $1 billion by the end of the third year.

Our Take

Walgreens Boots reported better-than-expected first-quarter results. The year-over-year strong increase in both earnings and revenues were encouraging.

Overall, 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 volume. Meanwhile, tough market conditions, particularly in retail, have been leading to sluggishness in Retail Pharmacy International division.

Meanwhile, the guidance for fiscal 2019 looks promising.

Zacks Rank & Key Picks

Walgreens currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader medical space are Integer Holdings Corp. ITGR , Surmodics, Inc. SRDX and Veeva Systems VEEV .

Veeva Systems' long-term earnings growth rate is estimated at 19.5%. The stock carries a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today's Zacks #1 Rank stocks here.

Integer Holdings, with a Zacks Rank #2, has an earnings growth rate of 31.2% for the first quarter of fiscal 2019.

Surmodics' long-term earnings growth rate is projected at 10%. The stock carries a Zacks Rank of 2 currently.

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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.


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

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