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

Walgreens Boots Alliance, Inc. (NASDAQ:WBA) 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.

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 (NYSE:MCK) 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. (NASDAQ:CERN) , DexCom (NASDAQ:DXCM) and HealthEquity (NASDAQ:HQY) . 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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