Shares of Walgreens Boots Alliance (WBA – Free Walgreens Stock Report) are getting beat up this morning, as investors were not happy with either the drug provider's second-quarter financial results or guidance. (Fiscal 2019 ends August 31st.) Investor sentiment has been growing in negativity for a while now, and the stock has lost about 20% of its value since the turn of the calendar (making it the worst performing member of the Dow 30 over that time). For good measure, WBA is trading almost 35% off its 52-week high and has etched a new five-plus year low.
Second-quarter financial results missed the mark almost across the board. The company reported share earnings of $1.64, nearly a dime below the year-earlier tally and a far cry from the 3.5% advance we were calling for, despite a considerably lower share count. For a clearer picture, the bottom line declined 13%, year over year and operating income was down 10.4%. The top line managed a 4.6% increase, but this was below what most on the Street, including us, had been forecasting.
The Retail Pharmacy USA business posted a 7.3% uptick in sales, but organic sales registered a far less impressive 1.6% advance when acquired Rite Aid stores are excluded. Prescriptions filled in comparable stores, meanwhile, improved just 1.8% over the previous-year period. On top of heightened competition, management said that profitability in this segment was further impeded by reimbursement pressures, trends that have been problematic for a while now.
The Retail Pharmacy International side of things was not any better during the February quarter. Overall sales decreased 7.1% and 1.2% on a constant currency basis, due to weakness in the United Kingdom. There, comparable pharmacy sales fell 1.5% and comparable retail sales dipped 2.3%.
Guidance only raised more investor concerns. Management said that it expects earnings per share to be relatively flat in fiscal 2019, compared to the 7%-12% growth it was previously forecasting. CEO Stefano Pessina acknowledged the difficult road ahead, citing accelerated market challenges and macroeconomic trends during the most recent conference call. Mr. Pessina said that the company will be "more aggressive" in its response to the rapidly shifting trends affecting the industry as a whole, but investors seemed to take little solace in his words. He also increased the targeted annual cost savings from the company's transformational cost management program from $1 billion, to in excess of $1.5 billion, but the benefits are not expected to be fully realized until fiscal 2022.
We've tempered our financial expectations for fiscal 2019. All things considered, we are now modeling for Walgreens to post share earnings of $6.15 a share, with quarterly declines likely to close out the year, and competitive and reimbursement pressures likely to remain a thorn in the company's side for the near term. Likewise, margins may retreat modestly until next year as the cost savings from the above mentioned initiative begin to roll in.
This stock is more difficult to gauge than in the recent past. While we think that the company should be able to get back on track and deliver solid earnings growth over the next three to five years, and that the pullback in price provides an attractive entry point for patient accounts, many on Wall Street do not seem to share our sentiment, suggesting that additional turbulence may be in the cards, thereby stripping some of the risk-adjusted attractiveness it possesses. Still, we believe that the downturn is overdone and that Walgreen's market position and finances will enable management to right the ship and deliver worthwhile shareholder returns over the long run.
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
