Story Stocks^®

Walgreens Boots Alliance (WBA +25%) has some pep in its step today after delivering back-to-back quarters of top and bottom-line upside in Q1 (Nov). The pharmaceutical retail chain also reiterated its FY25 (Aug) earnings outlook of $1.40-1.80, supported by benefits from cost management initiatives combined with relative strength in the company's U.S. pharmacy services businesses. WBA had a tough showing last year as shares plunged by over 65% as the company faced unfavorable retail conditions and an intensifying competitive landscape, prompting comprehensive turnaround initiatives under CEO Tim Wentworth, who took over in October 2023.

The front-end retail side of WBA remained under pressure in Q1 as consumers continued to shift their shopping behavior amid cumulative inflationary impacts. Last quarter, WBA announced the closing of approximately 1,200 of its roughly 8,000 stores over the next three years, with 500 shuttering in FY25, reflecting ailing retail demand. The silver lining was that WBA anticipated the move to be immediately accretive to profitability, helping offset weak front store volumes and supporting the company's reiterated EPS outlook for the year.

• In Q1, adjusted EPS fell by significantly less than analysts anticipated, sliding by 22.7% yr/yr to $0.51 on decent revenue growth of 7.6% to $39.5 bln, an acceleration from the +5.9% delivered last quarter. Growth was broad-based, similar to Q4 (Aug), underscoring further signs of demand stabilization.
• U.S. Retail Pharmacy was the laggard in Q1, posting sales growth of 6.6% on comps of +8.5%, which was mildly higher than last quarter. As has been the case over the past several periods, pharmacy sales shined, solely pushing the segment into positive growth territory by rising by 10.4% on comps of +12.7%, benefiting from higher branded drug inflation and prescription volume. On the flip side, retail sales fell by 6.2% on comps of -4.6%, highlighting a soft flu season and continued weakness in discretionary categories.
• The International segment took off from last quarter's modest 3.2% bump, accelerating to a 10.2% increase yr/yr. Boots UK pharmacy and retail comps rose by +10.9% and +8.1%, respectively, in Q1, a swift uptick compared to just two quarters ago when WBA was shopping this business.
• U.S. Healthcare, where WBA previously poured billions of dollars into VillageMD, CareCentrix, and Shields, growth unfolded across all divisions, leaping by 9%, 16%, and 30%, respectively. WBA remains amid a strategic and operational review toward simplifying its U.S. Healthcare portfolio and is underway with a sale process for VillageMD.
• Looking ahead, WBA expects growth in its U.S. Healthcare and International segments. However, it expects this to be offset by a decline in U.S. Retail Pharmacy, projecting a 4-5% drop in retail comps in FY25 compared to its previous forecast of a 2-3% drop, among a couple of other developments, including a higher tax rate.

The U.S. retail environment will likely remain challenging over the next several quarters, throwing obstacles in WBA's turnaround plan. Still, Q1 numbers were encouraging as back-to-back periods of growth reflect signs of stabilization, a much-needed development following such volatility over the past few years.