Walgreens Reports A Strong Q2 Driven By Growth In Holiday Sales And Medicare Part D Scripts
On April 9th, Walgreens (NASDAQ:WBA) announced results for the quarter ended 28 February 2015. This is the company’s first earnings announcement after its merger with Alliance Boots, which was completed on 31 December 2014. Historically, Walgreens’ operations were within one reportable segment. But, with the combination of the two companies, the company has organized its operations and is reporting results in three segments: retail pharmacy USA, retail pharmacy international and pharmaceutical wholesale. This means that numbers from this quarter are not directly comparable with those in the same period of last year. Below is a summary of the company’s performance on some key metrics.
Our current price estimate for Walgreens stands at $67. We are in the process updating our model for the Q2 2015 earnings to reflect the company’s new reporting structure.
View our analysis for Walgreens
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Brief Summary Of The Q2’15 Earnings
200 Stores In USA To Be Closed
In August 2014, Walgreens announced a three-year $1 billion cost-reduction initiative. The company, during the recent earnings release, said that it has identified additional opportunities for cost savings, primarily in their Retail Pharmacy USA division. These additional cost opportunities are expected to increase the total cost-savings by $500 million (which will be realized by the year 2017) to a projected $1.5 billion by the end of fiscal 2017.
As a part of this initiative, the company plans to close approximately 200 stores (about 2% of the total count) across the country to reorganize corporate and field operations, and drive operating efficiencies. It also expects to generate some savings by streamlining information technology and other functions. While store closure could potentially result in loss of sales generated from those stores, a recent study by the company indicated that it will be able to retain a sizeable share of customers, and therefore will not have any significant impact on the top line.
Expects More Consolidation In The US Healthcare Market
Margins have been squeezed for pharmacy retailers as the government continues to influence costs of the healthcare business, like the step down in Medicare Part D rates earlier this year. Walgreens expects such margin pressures to continue and drive further consolidation in the market. Considering that the structure of delivering medicines to patients is very complex today, significant synergies can be realized from M&A activities.
While horizontal consolidation (i.e. integration of companies operating in the same market) can help companies in getting leverage with suppliers in negotiating drug prices, vertical consolidation across one’s network could help eliminate multiple layers in the delivery process, contributing more to margins. The company’s Acting CEO, Stefano Pessina, said that if they see any indications of such moves in the industry, they will be leading such a change and are open to pursue opportunities that can deliver synergies and increase the value of the company.
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Other Sources:
WBA Earnings Call Transcript, TheStreet