Shares of Walgreens Boots Alliance (WBA – Free Walgreens Stock Report) were on the decline after the pharmacy services provider reported disappointing fiscal 2020 first-quarter financial results (year began October 1, 2019) and failed to provide a positive update on its privatization possibility.
The company missed the mark on both the top and bottom lines. Sales came in at $34.339 billion, 1.6% above the year-earlier figure, but below our call and the consensus estimate. Retail Pharmacy USA sales increased 1.6% year over year, on a 2.5% uptick in comparable pharmacy sales, offsetting a 0.5% comp decline on the retail side of things. Increased competition remained a big problem at the latter. Meantime, the Retail Pharmacy International unit saw sales slip 5.4%, hurt by lower prescription volume, tough market conditions in the United Kingdom and Chile, and currency headwinds.
On the profitability front, the overall operating margin fell roughly a full basis point, due to the soft top-line performance, combined with ongoing reimbursement pressures both domestically and abroad. As a result, adjusted earnings decreased 6.2% from the prior-year tally, to $1.37 a share, and fell short of our $1.40 target.
Guidance did little to help matters. Management left intact its outlook, saying that it continues to look for earnings per share to remain relatively flat in fiscal 2020, despite remaining active on the share-repurchase front. This points to ongoing operational struggles. We are leaving our fiscal 2020 share-net call of $6.00 unchanged to reflect the continuation of heightened competition in the retail business and reimbursement pressures on the pharmacy side of things.
Elsewhere, management said that the Transformational Cost Management Program remains on track to deliver the previously expected $1.8 billion in annual cost savings by fiscal 2022. Walgreens also announced two joint ventures. However, it did not say anything leading us to believe that the company is making any headway with its privatization efforts. Recall that private equity firm KKR (KKR) was said to have made an offer to do just that a few months back. That news was met with mixed reactions, with many on Wall Street speculating that the size and required finances to complete the deal made the marriage highly unlikely.
Shareholders were not happy with the November-period release, and rightfully so. Walgreens continues to face multiple challenges, and while cost-cutting efforts should pay off down the road, the business itself is likely to remain under pressure in the near future. The stock offers solid price-recovery potential out to 2022-2024, but prospects are more speculative than in years past. We advise that only patient investors willing to shoulder a fair degree of uncertainty consider a position in this Dow-30 member at this time.
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 in excess of 18,750 stores in more than 25 countries.
— Andre Costanza
