Walgreens Earnings Review: EPS Soars Despite Flat Revenue Growth

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WAG
Walgreen

Walgreens Boots Alliance (NASDAQ:WBA) announced mixed fourth quarter and full year earnings on Thursday, October 20th. For the quarter ending August 31st, the company’s revenue grew 0.4% to $28.6 billion over the prior-year quarter, missing the Reuters compiled revenue estimates of $29.5 billion. The company’s operating income increased 36% to $1.1 billion on year-over-year basis while the operating margin grew 1.1 percentage points to 4%, driven by lower selling, general and administrative expenses. In the last quarter, the company’s net income jumped more than 30 times to over $1 billion, for earning per share of $1.07.  This was an increase of 21% over the prior year quarter and exceeded analyst expectations of $1.01. For the quarter, the company’s free cash flow increased 96% to $2.2 billion, driven by a 77% increase in net cash from operating activities.

For the full fiscal year, revenues of Walgreens rose 13% over the prior year to $117 billion, driven by a 3.5% surge in revenues of Retail Pharmacy U.S.A and a 53% surge in revenues of Retail Pharmacy International division. Despite the increase in revenues, the company’s EPS declined 5% over the prior year to $3.85, primarily due to fluctuations in the fair value adjustments of AmerisourceBergen warrants. For the year ending August 31st, the company’s free cash flow increased 48% to $6.5 billion, driven by a 39% increase in net cash from operating activities.

As of August 31st, the company operates out of 12,848 stores across the globe, out of which 8,175 stores are situated in the United States.

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Retail Pharmacy 

The Retail Pharmacy U.S division, the main contributor to the company’s revenue, reported revenues of $20.7 billion, an increase of 4% over the prior year quarter. The increase in revenues was primarily attributed to a 3.2% increase in sales of comparable stores. Pharmacy sales increased 6.2% over the prior year quarter while retail sales declined 0.5%. The number of prescriptions filled in comparable stores rose 3.9% over the prior year quarter, primarily driven by increase in Medicare Part D volume. The segment’s operating income rose 52% to $779 million while the adjusted operating income surged 4.4% to $1.1 billion. The increase was driven by increased pharmacy volume, procurement efficiencies and cost controls, partially offset by higher cost transformation and LIFO charges in the last quarter.

The revenues of Retail Pharmacy International division declined 11% over the prior year quarter to $3 billion, primarily due to negative currency translations. On constant currency basis, the revenues showed a marginal declined of 0.6% over the prior year quarter.

For the full fiscal year, the revenues of Retail Pharmacy U.S rose 3.5% on year-over-year basis to $84 billion, primarily driven by higher comparable store sales. The segment’s operating income increased 13.2% to $4.4 billion, the rise mainly attributed to higher pharmacy volumes. On non-GAAP basis, the operating income was reported at $5.4 billion, an increase of 5% over the prior year.

The Retail Pharmacy International division showed an uptick of 53% over the fiscal year 2015 and reported revenues of $13.2 billion. The surge in revenues was attributed to addition of Alliance Boots to revenues of the company.

Rite Aid Merger and Future Outlook

In the earnings call following the release, Walgreens reiterated its position on the pending FTC approval of its acquisition of Rite Aid. The company clarified that it would divest between 500 to 1,000 stores, in order to comply with the requirements. The company now expects the merger to complete by early 2017, against its earlier expectations of completing the merger by the end of 2016.

Going forward, the company expects Rite Aid to be accretive to earnings in the first year post acquisition. For fiscal year 2017, the company expects to generate EPS of $4.85 to $5.20 per share, which includes  $0.05 to $0.12 from Rite Aid.


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