Walgreens (WBA) Up 4.1% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Walgreens Boots Alliance (WBA). Shares have added about 4.1% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Walgreens due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Walgreens Boots Beats on Q1 Earnings, Margins Decline

Walgreens Boots 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.

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.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Walgreens has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Walgreens has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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