Walgreens (WBA) Tops Q3 Earnings Estimates, Narrows View

Walgreens Boots Alliance, Inc. (NASDAQ:WBA) reported adjusted earnings per share (EPS) of $1.53 in third-quarter fiscal 2018, up 15% year over year and 13.5% at constant exchange rate (CER). The figure surpassed the Zacks Consensus Estimate of $1.47.

On a reported basis, net earnings came in at $1.3 billion, reflecting an increase of 15.5% from the prior-year quarter. Reported EPS came in at $1.35, up 26.2% on a year-over-year basis.

Total Sales

Walgreens Boots recorded total sales of $34.33 billion in the fiscal third quarter, up 14% year over year and 11.8% at CER. The top line outpaced the Zacks Consensus Estimate of $33.65 billion.

Segments in Detail

Walgreens Boots reports under three operating segments: Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale.

Retail Pharmacy USA

The segment recorded sales of $25.9 billion in the third quarter, highlighting an improvement of 15% year over year. Within this segment, total sales at comparable stores dropped 1.2%, while prescriptions filled in comparable stores were unchanged year over year. Retail sales increased 5.2% year over year, while comparable retail sales dropped 3.8%.

Pharmacy sales, which accounted for 72.5% of the Retail Pharmacy USA division’s sales in the quarter, increased 19.3% from the year-ago quarter on higher prescription volume from the acquisition of Rite Aid stores and central specialty. Pharmacy sales at comparable stores were unchanged year over year.

Retail Pharmacy International

Revenues at the Retail Pharmacy International division rose 6.6% on a year-over-year basis (down 2.1% at CER) to $3 billion. At CER, comparable store sales in the third quarter declined 1.4% year over year along with a 1.7% decline in comparable pharmacy sales.

Pharmaceutical Wholesale

The Pharmaceutical Wholesale division recorded quarterly sales of $6 billion, up 12.6% year over year (up 4% at CER).

Margins

Gross profit in the reported quarter increased 8.9% year over year to $7.78 billion. However, gross margin contracted 106 basis points (bps) to 22.7%.

Selling, general and administrative (SG&A) expenses were up 9.1% year over year to $6.23 billion. Operating income (including Equity earnings in AmerisourceBergen (NYSE:ABC)) increased 5.8% to $1.59 billion. Overall, operating margin contracted 36 bps to 4.7%.

Financial Condition

Walgreens Boots exited the third quarter with cash and cash equivalents of $1.82 billion, compared with $1.75 billion at the end of the second quarter. Long-term debt was $12.45 billion, compared with $12.53 billion at the end of the preceding quarter.

Year to date, the company has generated operating cash flow of $5.38 billion, compared with $5.24 billion a year ago. The resultant free cash flow was $4.40 billion, as compared to $4.32 billion a year ago.

Guidance Narrowed

Walgreens Boots has raised the low end of its outlook for fiscal 2018 EPS by 5 cents. The new projected range is $5.90 to $6.05. The Zacks Consensus Estimate for earnings is pegged at $5.96, within the company’s guided range.

Our Take

Walgreens Boots reported an impressive third quarter of fiscal 2018. The year-over-year increase in earnings and revenues is encouraging as well.

Also, in a bid to ensure availability of specialty brand drugs, Express Scripts and Walgreens Boots recently announced plans to expand their existing group purchasing efforts.

The company is also upbeat about the recent acquisition of stores from Rite Aid which has already started to strengthen its U.S. pharmacies business. Also, the solid guidance buoys optimism.The new $10 billion share repurchase program indicates the company’s focus on driving long-term stockholder value.

Zacks Rank & Key Picks

Walgreens Boots carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the broader medical space are, Genomic Health (NASDAQ:GHDX) , Abiomed (NASDAQ:ABMD) and Integer Holdings Corp. (NYSE:ITGR) .

Genomic Health has an expected earnings growth rate of 187.5% for the current quarter. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Abiomed has a projected long-term earnings growth rate of 27%. The stock sports a Zacks Rank #1.

Integer Holdings has a projected long-term earnings growth rate of 15%. The stock carries a Zacks Rank #2.

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