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Why Is Walgreens (WBA) Up 1% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Walgreens Boots Alliance (WBA). Shares have added about 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 the most recent earnings report in order to get a better handle on the important catalysts.

Walgreens Boots Tops Q3 Earnings, Revenues, Margins Decline

Walgreens Boots reported adjusted earnings per share (EPS) of $1.47 for third-quarter fiscal 2019, down 3.9% year over year (down 2.4% at constant exchange rate or CER). However, the figure exceeded the Zacks Consensus Estimate by 3.5%.

On a reported basis, net earnings came in at $1 billion, reflecting a 23.6% decline from the prior-year quarter. Reported EPS came in at $1.13, down 16.2% on a year-over-year basis.

Sluggishness in Retail Pharmacy International and margin contractions put pressure on the bottom line during the quarter.

Total Sales

Walgreens Boots recorded total sales of $34.59 billion in the fiscal third quarter, up 0.7% year over year and 2.9% at constant exchange rate or CER. The top line edged pastthe Zacks Consensus Estimate of $34.53 billion. Year-over-year growth was led by improvements within the Retail Pharmacy USA and Pharmaceutical Wholesale divisions, partially offset by a dull performance within Retail Pharmacy International.

Segments in Detail

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

Retail Pharmacy USA

The segment’s sales came in at $26.5 billion in the third quarter, highlighting an improvement of 2.3% year over year. Excluding the impact of store optimization following the acquisition of Rite Aid stores, organic sales growth was 2.9% year over year.

Pharmacy sales, accounting for 73.9% of the Retail Pharmacy USA division’s sales in the quarter, increased 4.3% from the year-ago quarter on higher brand inflation, prescription volume and growth in central specialty. Pharmacy sales at comparable stores improved 6% while prescriptions filled in comparable stores rose 4.7% year over year in the quarter. The impact of store optimization following the acquisition of Rite Aid stores caused a 2.9% dip in retail sales. Comparable retail sales slid 1.1% year over year.

Retail Pharmacy International

Revenues at the Retail Pharmacy International division decreased 7.3% on a year-over-year basis to $2.8 billion in the fiscal third quarter. Sales were down 1.6% at CER considering a 1% slip in Boots UK.

In the United Kingdom, comparable pharmacy sales inched up 0.8% and comparable retail sales declined 2.6% in the reported quarter.

Pharmaceutical Wholesale

The Pharmaceutical Wholesale division’s quarterly sales were $5.9 billion, down 1.7% year over year (up 8.3% at CER, banking on growth in the emerging markets).

Margins

Gross profit in the reported quarter fell 4.2% year over year to $7.45 billion. However, gross margin contracted 111 basis points (bps) to 21.5%.

Selling, general and administrative (SG&A) expenses remained relatively flat year over year at $6.24 billion. Adjusted operating income deteriorated 21.2% to $1.21 billion. Overall, operating margin shrank 98 bps to 3.5%.

Financial Condition

Walgreens Boots exited the fiscal third quarter with cash and cash equivalents of $839 million compared with $818 million at the end of second-quarter fiscal 2019. Long-term debt was $12.13 billion compared with $12.69 billion at the end of the fiscal second quarter. Year to date, the company generated operating cash flow of $3.22 billion compared with $5.45 billion in the year-ago period.

Guidance Intact

Walgreens Boots maintained its earlier-provided adjusted EPS guidance for fiscal 2019, flat with the year-ago period’s figure at CER.The Zacks Consensus Estimate for this metric is pegged at $5.99.

How Have Estimates Been Moving Since Then?

Estimates revision followed a downward path over the past two months.

VGM Scores

At this time, Walgreens has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

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

Outlook

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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