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Walgreens Boots (WBA) Q1 Earnings Lag Estimates, Margins Fall

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Walgreens Boots Alliance, Inc. (WBA - Free Report) reported adjusted earnings per share (EPS) of $1.37 for first-quarter fiscal 2020, down 6.2% year over year (down 5.7% at constant exchange rate or CER). Also, the figure missed the Zacks Consensus Estimate by 2.1%.

Reported EPS of 95 cents declined 19.5% on a year-over-year basis.

Sluggishness in Retail Pharmacy International and margin contraction built pressure on the bottom line.

Total Sales

Walgreens Boots recorded total sales of $34.34 billion in the fiscal first quarter, up 1.6% year over year and 2.3% at constant exchange rate or CER. The top line, however, missed the Zacks Consensus by 0.8%. The year-over-year growth was led by improvement within the Retail Pharmacy USA and Pharmaceutical Wholesale divisions, partially offset by a dull performance by Retail Pharmacy International.

Segments in Detail

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

Walgreens Boots Alliance, Inc. Price, Consensus and EPS Surprise

 

Walgreens Boots Alliance, Inc. Price, Consensus and EPS Surprise

Walgreens Boots Alliance, Inc. price-consensus-eps-surprise-chart | Walgreens Boots Alliance, Inc. Quote

 

Retail Pharmacy USA

The segment’s sales totaled $26.1 billion in the first quarter, highlighting an improvement of 1.6% year over year.

Pharmacy sales increased 2.9% from the year-ago quarter on higher brand inflation, prescription volume and growth in central specialty. Pharmacy sales at comparable stores improved 2.5% year over year, while prescriptions filled in comparable stores (adjusted to 30-day equivalents) rose 2.8% in the quarter. Retail sales dipped 2.2% while comparable retail sales slid 0.5% year over year on continued de-emphasis of tobacco.

Retail Pharmacy International

Revenues at the Retail Pharmacy International division declined 5.4% on a year-over-year basis to $2.7 billion in the fiscal first quarter. Sales were down 2.7% at CER due to lower Boots UK sales and lower sales in Chile.

Comparable pharmacy sales increased 0.6% at CER and comparable retail sales declined 3% at CER in the reported quarter.

Pharmaceutical Wholesale

The Pharmaceutical Wholesale division’s quarterly sales were $6 billion, up 5.2% year over year (comparable sales were up 8.3% at CER on growth in the emerging markets and the United Kingdom).

Margins

Gross profit in the reported quarter fell 4.9% year over year to $7.26 billion. Gross margin contracted 146 basis points (bps) to 21.1%.

Selling, general and administrative (SG&A) expenses were down 26.5% year over year to $6.26 billion. Operating income deteriorated 39% to $1 billion. Overall, operating margin contracted 111 bps to 2.9%.

Financial Condition

Walgreens Boots exited the first quarter of fiscal 2020 with cash and cash equivalents of $811 million compared with $1.02 billion at the end of fiscal 2019. Long-term debt was $10.63 billion at the end of the first quarter of fiscal 2020 compared with $11.09 billion at the end of the fiscal 2019. Net cash provided by operating activities was $1.1 billion, up from $460 million from year-ago period.

Fiscal 2020 Guidance

The company reaffirmed its guidance at roughly flat growth in fiscal 2020 adjusted EPS, on a constant currency basis, with a range of plus or minus 3%. The Zacks Consensus Estimate for fiscal 2020 adjusted earnings per share is currently pegged at $5.93.

Our Take

Walgreens Boots exited first-quarter fiscal 2020 on a sluggish note as both adjusted earnings as well as revenues missed the Zacks Consensus Estimate. The year-over-year decline in adjusted earnings is another cause for concern.

Meanwhile, tough market conditions, particularly in retail, have been inducing sluggishness in the Retail Pharmacy International division. Margin pressure is a major overhang on the stock. Overall, the Retail Pharmacy USA division saw an uptick in sales during the quarter on account of comparable prescription growth and a strong retail prescription market.

Also, a rise in Pharmaceutical Wholesale division sales buoys optimism.The recently-inked agreement with McKesson to create a German joint venture and an exclusive franchise deal in the United Kingdom with Mothercare hold promise.

Zacks Rank and Key Picks

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

Some better-ranked stocks in the broader medical space are Cerner Corp. (CERN - Free Report) , DexCom (DXCM - Free Report) and HealthEquity (HQY - Free Report) . While HealthEquity sports a Zacks Rank #1 (Strong Buy), Cerner and DexCom carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Cerner’s fourth-quarter revenues is pegged at $1.43 billion, calling for a year-over-year increase of 5%. The same for EPS stands at 74 cents, suggesting a year-over-year rise of 17.5%.

The Zacks Consensus Estimate for DexCom’s fourth-quarter revenues is pinned at $427.5 million, indicating a year-over-year increase of 26.5%. The same for EPS stands at 71 cents, suggesting year-over-year growth of 31.5%.

The Zacks Consensus Estimate for HealthEquity’s fiscal fourth-quarter revenues is pegged at $193.3 million, calling for a year-over-year increase of 155%. The same for EPS stands at 18 cents.

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