Shares of Walgreens Boots Alliance (WBA – Free Walgreens Boots Alliance Stock Report) fell modestly after the drugstore operator released fiscal first-quarter (ended November 30th) results and reaffirmed its guidance. November-period financials were a bit better than we had expected. The top line clocked in at $33.793 billion, a smidgen above our $33.750 billion forecast and up 10% from a year earlier. Much of the advance can be attributed to the Rite Aid acquisition. Breaking it down by division, the Retail Pharmacy USA business (which combines pharmacy and retail sales) saw its sales jump 14.4% (organic sales growth was 4.6%), while comparable-store sales were up 2.8%. Pharmacy sales benefited from higher prescription volumes. Retail, meantime, was weaker, hurt by a difficult comparison and the de-emphasis of certain products, namely tobacco. Comparable retail sales were down 3.2%. The Retail Pharmacy International segment was stymied (sales were down 5.9%) by unfavorable foreign exchange rates, as well as the divestiture of Boots Contract Manufacturing and a change in loyalty accounting. Currency movements also hurt the third segment, Pharmaceutical Wholesale. Here, sales were up 6.6% on a constant-currency basis, thanks to growth in emerging markets, but dipped 0.2% when exchange rates were taken into effect.
In terms of profitability, adjusted SG&A expenses fell 100 basis points as a percentage of sales at the Retail Pharmacy USA division (by far the largest segment), thanks to a more favorable sales mix and cost discipline. This was not the case overseas, however. All told, despite ``a challenging market and exceptional items in the U.K.,'' adjusted share earnings were $1.46, up 14% from a year earlier and $0.03 ahead of our call.
Management also announced a new cost-cutting initiative, which is expected to result in annual cost saving of over $1 billion by the end of its third year. Divisional optimization, global smart spending and organization, and increased digitalization are all part of the plan. Restructuring and other special charges are expected as result of this initiative, though we will likely exclude them from our earnings presentation.
Looking ahead, leadership maintained its full-year fiscal 2019 share-earnings guidance of 7%-12% growth on a constant-currency basis. For our part, we continue to like this blue-chip stock for its total return potential, which is more appealing on a risk-adjusted basis and after the equity's recent price retracement (down 15%-20% from its 52-week high).
About the Company: Walgreens Boots Alliance is one of the world’s premiere prescription drug providers, anchored by its network of drug stores in the United States and Europe. Currently, it operates more than 13,200 stores across 11 countries. It most recently acquired 1,932 Rite Aid locations, solidifying its domestic footprint. Pharmacy sales accounted for approximately 70% of the overall top line (as of 8/31/17).
- Matthew E. Spencer, CFA
