The Focus Of Walgreens’ Q4 Earnings Results Might Be On Its Deal With Rite Aid

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Walgreens is slated to release its fourth quarter fiscal 2017 earnings on October 25th and the highlight of the quarter has been its new deal with Rite Aid. After a failed attempt of a merger in July, the two entities have now entered into a deal wherein Walgreens will buy 1,932 stores, three distribution centers, and other inventory from Rite Aid for an amount of around $4.4 billion in cash and other consideration. Rite Aid also will have the option to buy generic drugs at similar costs as Walgreens for 10 years through a Walgreens affiliate. The deal has been approved by both the companies’ board of directors and is awaiting some customary closing requirements. Walgreens has recovered its quarter over quarter performance in Q3 after a slight setback in Q2. In Q3 fiscal 2017, it posted revenues of $30.12 billion, an increase of 2.1% over the prior year quarter and its EPS stood at $1.33 per share, 3 cents higher than market expectations.

Walgreens Domestic Presence Is Poised To Grow Due To The Deal With Rite Aid

In the third quarter, Walgreens’ Retail Pharmacy U.S division, its biggest revenue contributor, reported revenues of $22.5 billion, reflecting a 6% quarter-over-quarter growth. Walgreens’ pharmacy sales increased 10.3% over the prior year quarter, while retail sales declined 1.8%. The main driver for this was the growth in the number of prescriptions filled in comparable stores driven by the increase in Medicare Part D volume and its successful partnership with Prime Therapeutics. The company also reported the highest ever retail prescription market share of 20.5%, an increase of 110 basis points. We expect Walgreens presence in the domestic market will grow even further due to its deal with Rite Aid. The addition of 1,932 stores, to its currently operating 8,138 stores, might give Walgreens an edge over one of its biggest competitors, CVS, which has a store count of 9,676.

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How Else Will The Deal Aid Walgreens’ Growth?

Despite ups and downs earlier this year, it seems the Walgreens-Rite Aid deal is now happening with the recent regulatory clearance. The store purchases by Walgreen are expected to have started this month and are expected to be completed by the spring of 2018. The purchased stores will come under the Walgreens brand name over time. Rite Aid will provide certain transitory services to Walgreen for up to 3 years post the completion of the transaction, according to the revised agreement. Through this transaction, Walgreens expects to realize annual synergies due to cost savings, procurement, etc. to the tune of $300 million per year for a period of four years.

Additionally, since the new deal does not currently involve any debt, Walgreens’ capital structure should remain unaffected by Rite Aid’s highly levered structure.

 

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