Shares of Walgreens Boots Alliance (WBA – Free Walgreens Boots Stock Report) are trending modestly higher today even though the pharmacy services giant reported softer-than-expected fourth-quarter financial results. (Fiscal 2018 ended August 31st.)
Sales came in at $33.442 billion, 11% above the year-earlier tally, but about $500 million shy of our estimate. While the domestic side of the business turned in a 14.4% sales advance, this was largely the result of increased volume, thanks to the earlier acquisition of Rite Aid stores. In turn, comparable-store sales were up a far more modest 0.3% on a year-over-year basis. Digging deeper into the numbers reveals that generic and reimbursement pressures were a drag. Meantime, the International operation posted a 1.9% decrease in sales and a 2.7% decline on a constant-currency basis. Constant-currency comp sales were down 3.4% due to lower prescription volume and reduced pharmacy funding in the United Kingdom.
The bottom line came up a bit short of our expectations, too. Walgreens earned $1.48 a share in the August period, well within the company's guidance, but $0.03 below our estimate. The top-line performance was largely responsible for the disappointment. As expected, margins continued to be pinched by the aforementioned headwinds, as well as the ongoing integration of Rite Aid. That said, the effective tax rate was lower than expected and share repurchases remained healthy.
Investors were probably pleased with guidance. Management said that it expects to earn between $6.40 and $6.70 a share for all of fiscal 2019. The midpoint calls for a 9% advance and is a nickel higher than our estimate. We are raising our share-net target accordingly, but are trimming our top-line call to reflect the likelihood of ongoing organic sales softness, especially at the international portfolio. All told, we are now looking for Walgreens to earn $6.55 a share, on sales of about $137.5 billion. The latter represents a roughly 5% growth rate. Our forecast assumes about $10 billion in additional share repurchases and a lower tax rate.
Despite the August-quarter top- and bottom-line shortfall, we continue to recommend the stock for risk-averse parties looking for a long-term holding. Walgreens boasts healthy finances and strong cash flows, giving it the wherewithal to circumvent most hurdles that arise. And while we do not forecast for future M&A activity, management's successful track record, and willingness and ability to think outside the box ought to enable the company to remain ahead of the curve in an industry with attractive growth prospects. Meantime, investors are likely to continue to reap the rewards of the company's shareholder-friendly practices. The stock's 2 (Above Average) Safety rank adds to its risk-adjusted appeal.
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).
- Andre J. Costanza
