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Walgreens (WBA) Q4 Earnings Top Estimates, Revenues Lag

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Walgreens Boots Alliance, Inc. (WBA - Free Report) reported adjusted earnings per share (EPS) of $1.48 for fourth-quarter fiscal 2018, up 12.9% year over year (same at constant exchange rate). The figure surpassed the Zacks Consensus Estimate of $1.44.

On a reported basis, net earnings came in at $1.5 billion, reflecting an 88.5% surge from the prior-year quarter. Reported EPS came in at $1.55, up 103% on a year-over-year basis.

Full-year adjusted EPS was $6.02, reflecting an 18% rise from the year-ago period. The figure also surpassed the Zacks Consensus Estimate of $5.98 per share.

Total Sales

Walgreens Boots recorded total sales of $33.44 billion in the fiscal fourth quarter, up 10.9% year over year and 11.3% at constant exchange rate or CER. However, the top line missed the Zacks Consensus Estimate of $33.64 billion.

For the full year, the company reported revenues of $131.53 billion, an 11.3% improvement from the year-ago period. However, the reported figure lagged the Zacks Consensus Estimate of $131.60 billion.

Segments in Detail

Walgreens Boots reports under three operating segments: Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale.

Retail Pharmacy USA

The segment recorded sales of $25.5 billion in the fourth quarter, highlighting an improvement of 14.4% year over year. Within this segment, total sales at comparable stores edged up 0.3%, while prescriptions filled in comparable stores increased 1.3% year over year. With the addition of Rite Aid stores, retail sales increased 8.3% year over year. However, comparable retail sales dropped 1.9%.

Pharmacy sales, which accounted for 73.6% of the Retail Pharmacy USA division’s sales in the quarter, increased 16.7% from the year-ago quarter on higher prescription volume from the acquisition of Rite Aid stores and central specialty. Pharmacy sales at comparable stores improved 1.3% year over year on higher volume.

Retail Pharmacy International

Revenues at the Retail Pharmacy International division dropped 1.9% on a year-over-year basis (down 2.7% at CER) to $2.9 billion in the fourth quarter. At CER, comparable pharmacy sales declined 3.4% year over year and comparable retail sales dipped 0.9%.

Pharmaceutical Wholesale

The Pharmaceutical Wholesale division recorded quarterly sales of $5.6 billion, up 2.3% year over year (up 4.7% at CER).

Margins

Gross profit in the reported quarter increased 3.2% year over year to $7.58 billion. However, gross margin contracted 169 basis points (bps) to 22.6%.

Selling, general and administrative (SG&A) expenses dropped 1.7% year over year to $6.1 billion. Operating income (including Equity earnings in AmerisourceBergen) increased 30.3% to $1.46 billion. Overall, operating margin expanded 65 bps to 4.4%.

Financial Condition

Walgreens Boots exited the fiscal with cash and cash equivalents of $785 million, compared with $1.82 billion at the end of the third quarter. Long-term debt was $12.43 billion, compared with $12.45 billion at the end of the third quarter.

In fiscal 2018, the company generated operating cash flow of $8.27 billion compared with $7.25 billion a year ago. Resultant free cash flow was $6.9 billion, an increase of $1.0 billion from fiscal 2017.

Guidance Narrowed

Walgreens Boots provided outlook for fiscal 2019. The company projects adjusted EPS in the range of $6.40 to $6.70 (a 7% to 12% growth at CER). The Zacks Consensus Estimate of $6.44 per share is within the guided range.

The guidance assumes continued execution of the company’s earlier-announced $10 billion share repurchase program, including the expected repurchase of approximately $3 billion worth of shares in fiscal 2019.

Our Take

Walgreens Boots reported mixed fourth-quarter results with earnings beating the Zacks Consensus Estimate but revenues missing the mark. However, the year-over-year increase in both earnings and revenues was encouraging.

Overall, Retail Pharmacy USA division witnessed comparable prescription growth and benefited from a strong retail prescription market. Within this segment, Walgreens Boots has been making good progress on account of increasing prescription volume. Meanwhile, tough market conditions, particularly in retail, have been leading to sluggishness in Retail Pharmacy International division.

Meanwhile, the guidance for fiscal 2019 looks promising. The new $10 billion share repurchase program indicates the company’s focus on driving long-term stockholder value.

Zacks Rank & Key Picks

Walgreens Boots currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader medical space are Intuitive Surgical (ISRG - Free Report) , Amedisys, Inc. (AMED - Free Report) and Masimo Corporation (MASI - Free Report) .

Intuitive Surgical’s long-term expected earnings growth rate is 14.7%. The stock currently carries a Zacks Rank of 2 (Buy).

Amedisys’ long-term expected earnings growth rate is 19.4%. The stock holds a Zacks Rank #2 at the moment. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Masimo’s long-term expected earnings growth rate is 14.8%. The stock has a Zacks Rank #2 at present.

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