Walgreens FY 2015 Earnings: Robust Sales Growth And Cost Savings Boosted Profits

73.99
Trefis
WAG: Walgreen logo
WAG
Walgreen

Walgreens (NASDAQ:WBA) just announced its earnings for the fourth quarter and full-year ending August 2015 [1]. The company managed to beat expectations yet again, with an earnings per share of $0.88 that is 10% higher than the consensus estimate of $0.81 [2]. While industry headwinds negatively impacted gross margins throughout the year, Walgreens’ high comps growth and reductions in operating costs helped the company grow earnings year over year.

In the coming fiscal (FY 2016), earnings are expected to scale higher peaks largely due to higher acquisition synergies (arising from both Alliance Boots and Rite Aid acquisitions) and the company’s $1.5 billion cost-savings program. Thereafter, starting FY 2017, earnings will likely fall back to normal levels and reach a steady state.

Below, we discuss Walgreens’ performance during the recently concluded fiscal year as well as future expectations in more detail.

Relevant Articles
  1. Will Johnson & Johnson Stock Rebound To Its Pre-Inflation Shock Highs of $185?
  2. Should You Pick Eli Lilly Stock After A 4x Rise In Three Years?
  3. Down 9% This Year, What’s Next For Lululemon’s Stock Past Q4 Results?
  4. Down 14% In The Last Trading Session, Where Is Adobe Stock Headed?
  5. Will Higher Federal Government Spending, Gen AI Drive Digital Security Stocks Like CrowdStrike Higher?
  6. Up 30% In A Year Is FedEx Stock A Better Pick Over UPS?

View our analysis for Walgreens

Industry Leading Sales Growth

Sales in the Walgreens’ US pharmacy business increased by 6% year over year to $81 billion. At 9.3%, pharmacy growth was even higher in stores that have been open for at least an year. These numbers are substantially higher compared to the pharmacy comps growth at rivals  CVS Health (NYSE:CVS) and Rite Aid (NYSE: RAD), which tend to be in the 4%-5% range. Even in its international pharmacy division, Walgreens managed to earn $3.5 billion in sales (not comparable with sales in the year-ago period because of changes in accounting methods).

The higher growth rates in the U.S. could be attributed to Walgreens’ wider store network as well as benefits associated with being a pure play pharmacy chain. The company is likely to extend the lead over competition given its aggressive expansion into retail clinics and the recently announced acquisition of Rite Aid, which will further widen its reach once it is completed.

Synergies And Cost Savings Offset Margin Pressure

After the Alliance Boots acquisition, Walgreens set itself a target of $650 million in net synergies for fiscal 2015. It made tremendous progress on this front and exceeded the target by almost 25%, achieving synergies of $800 million. Combined with the strong store sales, it was able to offset the negative impact on earnings caused by margin headwinds (including low reimbursement rates and unfavorable changes in product mix).

In addition to acquisition synergies, Walgreens’ cost-savings program also boosted the bottom line to a certain extent.  Of the 200 planned store closures, 86 stores were closed during the fiscal that brought down operating costs. Excluding the effects of accounting adjustments associated with the Alliance Boots acquisition, SG&A expenses decreased by 85 basis points year-over-year resulting in an operating income (adjusted) growth of 12.5%. Given the company’s target of $1.5 billion in cost savings by the end of fiscal 2017, further improvement in operating margins is likely to be seen.

Stock Buyback To Be Temporarily Kept On Hold

Walgreens is expected to spend a sum of $17 billion for the acquisition of Rite Aid. As the amount would be paid in cash, it has decided to suspend its share repurchase program in 2016 and will redeploy the cash to fund the transaction and pay down its financing. Therefore, the positive effect of share buybacks on earnings per share will be absent next fiscal, negatively impacting future earnings expectations. However, the impact on earnings guidance turned out to be minimal for FY 2016, with earnings per share expected to be in the range of $4.25 to $4.55 (versus $4.25 to $4.60 earlier).

We will cover the details and benefits of the Rite Aid acquisition in another post. Meanwhile, here’s an article from our archives where we discuss the potential benefits arising from a Walgreens-Rite Aid merger.

View Interactive Institutional Research (Powered by Trefis)

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

Other Source: Seeking Alpha Earnings Transcript

Notes:
  1. Walgreens Boots Alliance Press Release []
  2. Nasdaq []