How Does Walgreens Spend Its Money?

Walgreens Boots Alliance (NYSE:WBA) total expenses have increased gradually from around $99 billion in fiscal 2015 to about $133 billion in fiscal 2019. As a percentage of revenues, expenses have grown, going from 95.9% to 97.1% over the same period.

Cost of Goods Sold (COGS) is the biggest expense head for the company, with it being 74% of revenue in fiscal 2015, before increasing to around 78% of revenue in fiscal 2019. This compares with CVS Health, which saw its COGS as % of revenue decline from 84% in 2016 to an estimated 61% in 2019. However, in the case of CVS, the Aetna acquisition resulted in a significant decline in COGS in 2019, while its operating expenses grew. The increase in COGS for Walgreens has led to a slower growth in profitability, driving EPS from $4.06 to $4.29 between fiscal 2015 and fiscal 2019, reflecting growth of 5.6%, as compared to revenue growth of 32.3% over the same period.

The company’s stock price has corrected over 35% between fiscal 2015 and 2019, and this can partly be attributed to the growth in expenses. However, for fiscal 2020, COGS as % of revenue is expected to remain around the 78% mark, while revenues are expected to grow 2%. Net income margin could still see a slight decline due to an increase in other expenses, including interest. Below, we take a look at the key drivers of Walgreens’ expenses and net margins. You can look at our interactive dashboard analysis ~ WBA Expenses: How Does Walgreens Boots Alliance Spend Money? ~ for more details.

Breakdown of Walgreens’ Total Expenses In Fiscal 2019:

• Total = $133 billion
• COGS = $106.8 billion
• Operating Expenses = $24.8 billion
• Provision for income taxes = $0.7 billion
• Non-operating expenses = $0.6 billion

Walgreens’ Net Income Margin Has Largely Been On A Decline Over The Recent Years, Although It Saw Slight Jump In Fiscal 2018, Due To Lower Spend On SG&A

Walgreens’ Total Expenses Stood At $133 Billion In Fiscal 2019, And They Could Increase To $136 Billion In Fiscal 2020

• Walgreens’ total expenses have grown from $99 billion in fiscal 2015 to about $133 billion in fiscal 2019.
• For fiscal 2020, we expect total expenses to be around $136 billion, which comprises of
  • 1) COGS: $109.1 billion
  • 2) Operating Expenses: $25.1 billion
  • 3) Non-Operating Expense: $0.7 billion
  • 4) Income Taxes: $1.2 billion
• Below, we take a look at how the company’s key expense components have trended and the key reasons for the change.

1. COGS Has Been On A Rise

• Cost of Goods Sold (COGS) has increased from $76.7 billion in fiscal 2015 to $106.8 billion in fiscal 2019.
• This can be attributed to overall growth in customers, as well as pricing trends.
• It could grow to $109.1 billion in fiscal 2020, in line with revenue growth.
• As % of revenue, COGS has increased from 74% to 78% over the same period.

2. Operating Costs Have Largely Been Stable

• Operating Costs have increased from $20.8 billion in fiscal 2015 to $24.8 billion in fiscal 2019 driven by:
  • (A) $2.9 billion increase in SG&A, and
  • (B) $1.2 billion increase in other expenses (gains).

(A) SG&A Grew From $22.4 Billion In Fiscal 2015 To $25.2 Billion In Fiscal 2019

• This was driven by the overall growth in sales.
• As a % of revenues, SG&A declined from 21.7% to 18.4% over the same period.
• The figure is expected to decline slightly to 18.3% in fiscal 2020.

(B) Other Expenses (Gains) Have Increased Over The Recent Years

• The company reported gains of $1.6 billion in fiscal 2015, and the figure declined to $0.4 billion in fiscal 2019, amid increase in other expenses.
• As a % of revenues, Other Expenses grew from -1.5% to -0.3% over the same period.
• The jump in fiscal 2016 can partly be attributed to other expenses of $180 million, as compared to gains of $1.5 billion in the prior fiscal related to Alliance Boots acquisition and AmerisourceBergen warrants.

3. Walgreens’ Non-Operating Expenses Primarily Includes Interest Expenses

• Interest expenses grew from $605 million in fiscal 2015 to $704 million in fiscal 2019.
• As a % of long-term debt, interest expenses grew from 4.6% To 6.0% over the same period, amid growing interest rates.
• The company’s long term debt jumped to $17.8 billion in fiscal 2016 with respect to financing for the Rite Aid transaction.
• However, it has been on a decline thereafter, and stood at $11.1 billion in fiscal 2019.

4. Walgreens’ Income Tax Expense Has Fluctuated In Recent Years

• This was partly driven by the Tax Cut and Jobs Act, which impacted the taxes in fiscal 2018 and 2019.
• Over the recent years the company has recorded certain tax benefits, including from its Rite Aid transaction, among others, and the same resulted in lower taxes.
• Effective Tax Rate declined from 17% to 11% between fiscal 2015 and fiscal 2019.
• We expect the figure to be around the corporate tax rate of 21% in fiscal 2020.

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