Walgreens Boots Alliance, Inc. (WBA Quick QuoteWBA - Free Report) is gaining from strategic collaborations and noteworthy product launches. However, weak margins and stiff rivalry do not bode well. The stock currently carries a Zacks Rank #3 (Hold).

Walgreens Boots exited fiscal 2022 with better-than-expected earnings and revenues. Retail comp sales in the United States and Boots UK were both strong, with the United States up 6% and Boots U.K. up 19% over fiscal 2021. Several of the company’s initiatives continued to gain traction. U.S. digital sales grew 37% in the fiscal year on top of 74% growth in 2021. myWalgreens membership crossed a big milestone, reaching 102 million customers.

U.S. retail margin expanded 100 basis points, ahead of its competitors. The company also recognized meaningful contributions from alternative profit streams at $125 million in income for fiscal 2022, including Walgreen’s advertising group, with 35% growth. In the pharmacy, the company administered 35 million vaccinations in fiscal 2022, well beyond its expectations. Scripts volume was softer than expected in fiscal 2022. The company is now focusing on strategic investments to return about 3,000 stores to normal operating hours. This is expected to drive script volume recovery through fiscal 2023.

Walgreens Boots Alliance, Inc. Price

Walgreens Boots Alliance, Inc. price | Walgreens Boots Alliance, Inc. Quote

Within the U.S. Healthcare segment, the company is optimistic about the acquisition of CareCentrix. The latest accelerated deal, opting for full ownership in CareCentrix, is expected to position Walgreens Boots well in the home care market. According to the company, if the initial acquisition of a 55% stake had closed in line with the original timeframe, Walgreens Boots would have achieved its $3 billion to $3.2 billion sales goal in fiscal 2022.

Added to this, VillageMD and Blue Shields continued to realize tremendous top-line growth in 2022, driving pro-forma total growth of 75% for the year.

Strategically, Walgreens Boots is committed to four priorities, to transform and align the core business; build its next growth engine, Walgreens Health; focus on its portfolio and optimize capital allocation; and build a high-performance culture and a winning team.

In fiscal 2022, the company continued to progress in transforming the pharmacy business and the method of delivering healthcare through physical stores and digital channels. It is currently focused on labor investments on returning about 3,000 stores to normal operating hours, which is expected to result in an accelerated rebound in script volume into fiscal 2023.

In line with its second strategy, the company’s decision to acquire the full stake in CareCentrix is aligned strategically. VillageMD and Blue Shields continued to realize tremendous top-line growth in 2022, driving pro-forma total growth of 75% for the year.

On the flip side, Walgreens Boots’ fourth-quarter fiscal 2022 earnings declined significantly on a year-over-year basis. Lower COVID-19 vaccination volumes in the reported quarter, macroeconomic headwinds and rising expenses impacted the bottom line. Fourth-quarter sales missed the Zacks Consensus Estimate and declined on a year-over-year basis, majorly impacted by a 660-bp impact from the anticipated sales decline at AllianceRx Walgreens.

According to the company, with inflation at a four-decade high, consumers are expressing uncertainty about the future and seeking value. Scripts volume remained soft due to temporary reductions in-store operating hours impacted by staffing shortages. Operating hour limitations impacted scripts by about 270 basis points in the fourth quarter, with a full-year impact of around 180 basis points.

Further, in the last few years, the slowdown in generic introduction has been affecting Walgreens Boots’ margins. In addition, of late, increased reimbursement pressure and generic drug cost inflation have been hampering Walgreens’ margin on a significant level. In the fourth quarter of fiscal 2022, gross profit fell 14.6% year over year. Gross margin contracted 214.2 bps to 19.8%. Selling, general and administrative expenses were up 10.1%. The company reported an adjusted operating loss of $909 million for the quarter under review compared to $854 million of operating profit in the year-ago period.

Over the past year, Walgreens Boots has underperformed the industry. The stock has lost 24.2% compared with the industry’s 11.3% decline.

Key Picks

A few better-ranked stocks in the broader medical space that investors can consider are ShockWave Medical, Inc. (SWAV Quick QuoteSWAV - Free Report) , Orthofix Medical Inc. (OFIX Quick QuoteOFIX - Free Report) and Merit Medical System (MMSI Quick QuoteMMSI - Free Report) .

ShockWave Medical, carrying a Zacks Rank #2 (Buy) at present, has an estimated growth rate of 33.1% for 2023. The company’s earnings surpassed estimates in all the trailing four quarters, the average beat being 180.1%.

ShockWave Medical has outperformed its industry in the past year. SWAV has gained 35% against the industry’s 32.6% fall in the past year.

Orthofix Medical, currently sporting a Zacks Rank #1 (Strong Buy), reported third-quarter 2022 adjusted EPS of 13 cents, which beat the Zacks Consensus Estimate by a stupendous 550%. Revenues of $114 million outpaced the consensus mark by 2.7%.

Orthofix Medical has an estimated growth rate of 58.97% for the next year. OFIX’s earnings surpassed estimates in the trailing three quarters and missed in one, the average being 129.1%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Merit Medical, currently carrying a Zacks Rank of 2, reported third-quarter 2022 adjusted EPS of 64 cents, which beat the Zacks Consensus Estimate by 20.8%. Revenues of $287.2 million outpaced the consensus mark by 5.2%.

Merit Medical has an estimated long-term growth rate of 11%. MMSI’s earnings surpassed estimates in all the trailing four quarters, the average being 25.4%.