Walgreens Q2 Earnings Review: Partnerships Help Drive Growth

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Walgreens Boots Alliance

Walgreens Boots Alliance (NASDAQ:WBA) announced relatively soft second quarter earnings on Wednesday, April 5th. For the quarter ending February 28th, the company’s revenue dipped 2.4% to $29.4 billion over the prior-year quarter, missing the Reuters compiled revenue estimates by almost $800 million. On a constant currency basis, the revenues increased a moderate 1% y-o-y. The company’s operating income declined 20% to $1.4 billion on a year-over-year basis while the operating margin dipped 1.2 percentage points to 5%, driven by higher selling, general and administrative expenses and equity earnings related to ABC. In the last quarter, the company’s net income jumped 14% over $1 billion, for earnings per share of 98 cents. On an adjusted basis, the company reported EPS of $1.36, in line with market expectations.

As of February 28, the company operates out of 12,827 stores across the globe, out of which 8,126 stores are situated in the United States.

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Retail Pharmacy Continues To Grow

The Retail Pharmacy U.S division, the main contributor to the company’s revenue, reported revenues of $21.8 billion, an increase of 1.5% over the prior year quarter. The increase in revenues was primarily attributed to a 2.4% increase in comparable store sales. Pharmacy sales increased 3.7% over the prior year quarter, while retail sales declined 2.7%. The number of prescriptions filled in comparable stores rose 6% over the prior year quarter, primarily driven by increase in Medicare Part D volume, on the back of successful partnerships with PBMs, and a favorable flu season. The decline in retail sales was primarily due to the company shutting down some of its e-commerce operations last year.  However, the company’s Beauty program continues to perform well, with its in house brands contributing one-sixth of the segment’s total sales. The company intends to expand its beauty offerings to another 1,000 stores by the end of the current calendar year, which should help boost its retail sales. The segment’s revenue per store increased a moderate 2.3% y-o-y, on the back of strong performance of its pharmacy division.

Screen Shot 2017-04-06 at 16.03.50Strong currency headwinds and unfavorable conditions impacted impacted the revenues of the Retail Pharmacy International division, which declined 14.5% over the prior year quarter to $3.1 billion. On a constant currency basis, the revenues showed a marginal declined of 1.9% over the prior year quarter.

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The company’s Cost Transformation program, launched in April 2015 with an aim to bring $1.5 billion in cost benefits by the end of fiscal 2017, achieved its target prior to the proposed deadline. The company expects to generate another $300 million in savings before the end of the current fiscal year.

For the first six months on the current fiscal year, Walgreens’ free cash flow increased 13% y-o-y to $2.7 billion. The increase in free cash flow is primarily due to a 10% increase in net cash from operating activities, which rose primarily due to higher net income and an increase in accounts payable.

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Rite Aid Deal And Guidance

Walgreens is confident that it will be able to close the Rite Aid deal before the current deadline expires. The company is hopeful that its revised terms, announced in January, will comply with demands of regulatory authorities. The company also stated that its plans to certify compliance, thereby ensuring a finite timeframe for the closure of the deal. Lastly, Walgreens reiterated its full year earnings guidance, which it expects to be in the range of $4.90 to $5.08 per share. The higher end of the guidance would reflect growth of almost 11% y-o-y.


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