Walgreens Boots Alliance (WBA 55.76, -7.73, -12.17%) is trading at a five-year
low after the company missed earnings estimates and lowered guidance for fiscal
Chief Executive Stefano Pessina said, “The market challenges and macro trends we have been discussing for some time accelerated, resulting in the most difficult quarter we have had since the formation of Walgreens Boots Alliance. During the quarter, we saw significant reimbursement pressure, compounded by lower generic deflation, as well as continued consumer market challenges in the U.S. and UK."
Second quarter sales grew nearly 5%, in-line with estimates. Sales in the Retail Pharmacy USA division grew 1.6% on an organic basis, excluding Rite Aid stores. International pharmacy sales fell 1.2% excluding a 5.9% adverse currency impact. Comparable US pharmacy sales grew 1.9% in the US, but comparable retail sales were down 3.8% in the quarter, primarily due to a weak cough, cold, and flu season compared with the year-ago quarter, continued de-emphasis of select products such as tobacco and a decline in sales of seasonal merchandise. Wholesale pharmacy revenue fell 0.3% as 9% growth was wiped away by currency headwinds.
Second quarter adjusted EPS fell 5% to $1.64, missing estimates by $0.08. Adjusted operating income fell 10% to $1.9 bln, primarily due to rising reimbursement pressure in the U.S. pharmacy business with fewer opportunities for mitigation as a result of slowing deflation of generic medications. In addition, performance was impacted by weak comparable store sales in U.S. retail and a challenging market in the UK.
The company now forecasts fiscal 2019 EPS flat yr/yr, down from 7-12% growth previously (excluding currency impacts). The new earnings forecast of just under $6.00/share was ~6% below consensus.
Walgreens is taking immediate actions to improve operations and now sees mid-to-high single-digit growth in adjusted EPS, at constant currency rates, in the following years.
The company raised its annual cost savings target from the transformational cost management program from in excess of $1 bln to in excess of $1.5 bln by fiscal 2022.
Pharmacies continue to deal with reimbursement pressures. It seems they are getting squeezed as costs continue to get wrung out of the bloated healthcare supply chain. Consolidation among health insurers likely hasn't helped. Recall, CVS (CVS) -3% reported dismal results in February, due to reimbursement and pricing pressures. Unlike CVS, Walgreens doesn't own its own pharmacy benefit manger.
Meanwhile, competition at the front end of the store is fiercer than ever. Drug stores offer convenience and don't really compete on price, so price conscious consumers have reason to avoid shopping there.
With a $53 bln market cap, Walgreens Boots Alliance trades at ~9x EPS vs. CVS at ~8x and the average retailer in the low-to-mid-teens. Drug distribution stocks and health insurers are also trading lower this morning.
- OUR VIEW
- LEARNING CENTER