Walgreens: Recovering With the People, Not the Economy
Before the market opened on July 9, Walgreens Boots Alliance Inc. (NASDAQ:WBA) announced its earnings results for its third quarter of fiscal 2020, which ended on May 31.
The pharmacy retailer fell short of analysts' earnings estimates and its earnings from the prior-year quarter, causing shares to drop 7.76% over the course of the day's trading.
Earnings results
Walgreens reported a 0.1% increase in revenue to $34.6 billion compared to the prior-year quarter, but it reported a negative bottom line, with a net loss of $1.71 billion, or $1.95 per share, down from earnings per share of $1.13 in the prior-year quarter. Adjusted earnings were 83 cents per share, primarily due to the exclusion of one-time Covid-19 related costs and impacts of 61 cents and 65 cents per share.
Analysts surveyed by Refinitiv had predicted revenue of $34.36 billion and adjusted earnings of $1.17 per share.
The company cited loss of foot traffic as the main reason for sales declines, especially in Boots stores in the U.K. Foot traffic at Boots U.K. was down as much as 85% in April. Beauty and fragrance counters remain closed, as do many airport locations.
While sales in the U.S. were up 3% compared to a year ago, this was outweighed by increased cleaning expenses and a shift away from higher margin discretionary categories toward lower margin essentials categories. The gross margin was 18.6% for the quarter compared to 21.55% in the prior-year quarter, while the operating margin was -5.3% compared to 3.52%.
Financials
As of the quarter's end, the company had $4.3 billion in short-term debt and $12.11 billion in long-term debt compared to $943 million in cash, cash equivalents and restricted cash.
Despite net cash from operating activities slowing to $68 million compared to $3.2 billion in the prior-year quarter, the company remained committed to its quarterly dividends, increasing the payment by 2.2%. However, the company did suspend its share repurchase program.
On recovery
As a pharmacy retailer, Walgreens has a consumer red flag that non-pharmacy retailers don't: a known higher concentration of sick people. This does not exactly encourage non-essential foot traffic during a pandemic.
This is supported by the fact that pharmacy volume, doctor visits and hospital patient admissions have dropped worldwide on average. Those who do not have Covid-19 are much more reluctant to go to places where they are more likely to contract the virus, cutting down on the number of voluntary surgeries, preventative medicine visits, common cold visits, etc.
Walgreens and other pharmacy retailers are tied much more closely to the health crisis and the surrounding humanitarian issues than other retailers. Executive Vice Chairman and CEO Stefano Pessina highlighted the company's efforts to combat Covid-19 on the earnings report:
"Prior to the pandemic our financial performance for fiscal 2020 was on track with our expectations. However, this unprecedented global crisis led to a loss in the quarter as stay-at-home orders affected all of our markets. I'm very proud of how all of our teams mobilized and adapted to deliver essential services in our communities across the world. Shopping patterns are evolving more rapidly than ever as consumers further embrace digital options, spurring us to accelerate our ongoing investments in digital transformation and neighborhood health destinations. This includes our two recent announcements: a significant expansion of our primary care clinics collaboration with VillageMD, and our strategic partnership with Microsoft (NASDAQ:MSFT) and Adobe (NASDAQ:ADBE) to launch a personalized omnichannel healthcare and shopping experience."
Guidance
For full fiscal 2020, the company had modified its guidance to a range of $4.65 to $4.75 in adjusted earnings, with expected Covid-19 impacts of between $1.03 and $1.14 per share.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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