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Can Retail Pharmacy USA Lift Walgreens' (WBA) Q2 Earnings?

Zacks Equity Research

Walgreens Boots Alliance, Inc. WBA is slated to release second-quarter fiscal 2019 results on Apr 2, before market open.

In the last reported quarter, the company delivered a positive earnings surprise of 2.1%. It has outperformed the Zacks Consensus Estimate in the last four quarters, the average positive earnings surprise being 5.1%.

Let’s take a look at how things are shaping up prior to this announcement.

Key Catalysts

Over the recent past, Walgreens Boots’ Retail Pharmacy USA division witnessed comparable prescription growth and benefited from a strong retail prescription market. Notably, revenues from this division accounted for more than 76.1% of total first-quarter fiscal 2019 revenues.

Also, Walgreens Boots' purchase of 1,932 stores, three distribution centers and related inventory from Rite Aid has already started to prove beneficial for the company with respect to a number of aspects. In this regard, Pharmacy sales, which contributed around 74.4% to the division’s sales in the first quarter of fiscal 2019, increased 17.5% year over year. The upside was primarily led by increased prescription volume from the buyout of Rite Aid stores and central specialty.  

Notably, Walgreens Boots has been witnessing increasing comparable prescription growth. The company is benefitting from the transfer of prescriptions from Rite Aid stores. It continues to believe that the underlying trend in terms of prescription volumes and market share in the United States have been in its favor for quite some time now.

Walgreens Boots Alliance, Inc. Price and EPS Surprise

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

Several planned developments, early benefits from new pharmacy contracts as well as volume expansion owing to previously-announced pharmacy partnerships have been driving growth in this space.

At the same time, the company has been gaining from its partnership with FedEx regarding existing stores. The retail pharmacy market has been witnessing rise in expenditure on prescription drugs and growing demand for specialty drugs.

Moreover, the company has recently started installing the Alipay system at its stores in the United States, thereby expanding its partnership with Alibaba. This move is expected to attract more Chinese customers to the stores and thus boost its top line.

Walgreens Boots has also been witnessing comparable sales growth in the health, wellness and beauty groups gaining from investments in its top stores.

Thus, widening pharmacy network, healthy prescription volumes along with contributions from Rite Aid are expected to contribute to Walgreens Boots’ top line in the to-be-reported quarter. 

Accordingly, the Zacks Consensus Estimate for second-quarter total revenues at the Retail Pharmacy USA division is pegged at $26.45 billion, indicating a rise of 10.8% year over year.

Meanwhile, tough market conditions, particularly in retail, have been leading to sluggishness in the Retail Pharmacy International division. Declining U.K. prescription volumes and continuing reimbursement pressure from the U.K. government are headwinds.

Walgreens Boots is investing in new stores and digital content to improve U.K. retail performance. The Zacks Consensus Estimate of $3.15 billion for revenues from the Retail Pharmacy International division reflects a 2.5% decline from the year-ago quarter.

Strong growth in certain emerging markets is expected to consistently drive the company’s Pharmaceutical Wholesale division.

The Zacks Consensus Estimate for total revenues of $34.87 billion depicts a 5.6% rise on a year-over-year basis.

On the flip side, Walgreens Boots’ gross margin figure has been declining for some time now. However, the company is working to gain efficiency and provide high quality, cost-effective pharmacy services in order to reduce pharmacy costs.

Here is what our quantitative model predicts:

Walgreens Boots does not have the right combination of two main ingredients — a positive Earnings ESP  and a Zacks Rank #3 (Hold) or higher — which are needed for increasing the odds of an earnings beat.

Earnings ESP: Walgreens Boots has an Earnings ESP of -2.35%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Walgreens Boots carries a Zacks Rank of 4 (Sell). Please note that we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revision.

The Zacks Consensus Estimate for earnings of $1.70 represents a 1.7% decline on a year-over-year basis.

Stocks Worth a Look

Here are a few medical stocks worth considering as these have the perfect combination of elements to come up with an earnings beat in the to-be-reported quarter.

Cardinal Health, Inc. CAH has an Earnings ESP of +18.49% and a Zacks Rank of 2 (Buy).

Luminex Corporation LMNX has an Earnings ESP of +61.77% and is a Zacks #3 Ranked player. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Edwards Lifesciences Corporation EW has an Earnings ESP of +6.03% and is a Zacks Rank #3 stock.

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