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Walgreens (WBA) Down 2.1% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Walgreens Boots Alliance (WBA - Free Report) . Shares have lost about 2.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Walgreens due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Walgreens Boots Lags Q2 Earnings, Margins Decline

Walgreens Boots reported adjusted earnings per share (EPS) of $1.64 for second-quarter fiscal 2019, down 5.4% year over year (down 4.3% at constant exchange rate or CER). The figure missed the Zacks Consensus Estimate of $1.70 by 3.5%.

On a reported basis, net earnings came in at $1.16 billion, reflecting a 14.1% decline from the prior-year quarter. Reported EPS came in at $1.24, down 8.3% on a year-over-year basis.

Per management, a difficult macroeconomic environment and market challenges made fiscal second quarter the toughest since the formation of the Walgreens Boots Alliance.

Total Sales

Walgreens Boots recorded total sales of $34.53 billion in the fiscal second quarter, up 4.6% year over year and 6.7% at constant exchange rate or CER. The top line missed the Zacks Consensus Estimate of $34.87 billion.

Segments in Detail

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

Retail Pharmacy USA

The segment recorded sales of $26.3 billion in the second quarter, highlighting an improvement of 7.3% year over year. Excluding benefits from the acquired Rite Aid stores, organic sales growth was 1.6% year over year.

Pharmacy sales, which accounted for 71.9% of the Retail Pharmacy USA division’s sales in the quarter, increased 9.8% 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 1.9% while prescriptions filled in comparable stores increased 1.8% year over year in the quarter. With the addition of Rite Aid stores, retail sales increased 1.3% year over year. However, comparable retail sales dropped 3.8%.

Retail Pharmacy International

Revenues at the Retail Pharmacy International division dropped 7.1% on a year-over-year basis to $3.1 billion in the second quarter. Sales were down 1.2% at CER considering a 1.3% decline in Boots UK.

In the United Kingdom, comparable pharmacy sales dropped 1.5% and comparable retail sales declined 2.3% in the reported quarter.

Pharmaceutical Wholesale

The Pharmaceutical Wholesale division recorded quarterly sales of $5.7 billion, down 0.3% year over year (up 9.1% at CER banking on continued growth in emerging markets and the U.K.).

Margins

Gross profit in the reported quarter declined 4.3% year over year to $7.75 billion. However, gross margin contracted 210 basis points (bps) to 22.4%.

Selling, general and administrative (SG&A) expenses remained relatively flat year over year at $6.32 billion. Adjusted operating income after excluding equity earnings in AmerisourceBergen declined 19.7% to $1.43 billion. Overall, operating margin contracted 130 bps to 4.1%.

Financial Condition

Walgreens Boots exited the fiscal second quarter with cash and cash equivalents of $818 million, compared with $980 million at the end of first-quarter fiscal 2019. Long-term debt was $12.69 billion, compared with $11.65 billion at the end of fiscal first quarter. In the six months ending Feb 28, 2019, the company generated operating cash flow of $1.20 billion compared with $3.21 billion in the year-ago period.

Guidance Tweaked

Walgreens Boots lowered its fiscal 2019 adjusted EPS guidance from 7-12% growth at CER to roughly flat. The Zacks Consensus Estimate for the metric is pegged at $6.39.

The company had announced the introduction of a transformational cost management program in the last-reported quarter. Walgreens Boots has now revised the targeted annual cost savings to more than $1.5 billion from more than $1 billion by fiscal 2022.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -10.16% due to these changes.

VGM Scores

At this time, Walgreens has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Walgreens has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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