Walgreens Boots Alliance (NYSE: WBA) is poised to become a global drugstore and prescription powerhouse, reflected in its fiscal second-quarter earnings reported Tuesday.
In a sector that was once struggling to compete with itself and with other retailers, the massive international consolidations will make Walgreens a force to be reckoned with.
Walgreens must, however, first digest acquisitions and get cost cuts finished so investors can examine organic growth plans.
Walgreen Earnings Reflect Expense Cuts
In the Walgreens earnings report, it said it earned $1.31 per share, up 11% year-over-year. However, the growth was really the result of expense cuts and increased efficiencies wrung out of the operation. The true bottom line number that concerns me in the Walgreens earnings report was the $900 million in net income, which was $0.85 per share. That was down a smashing 55% year over year.
The numbers can be misleading because Walgreens was still digesting the Boots acquisition during the quarter. Thus, while sales were $30.2 billion in the quarter, and that was a 13.5% increase, much of it was because elements of Boots had not been included in last year’s results. Even worse, currency exchange hurt sales by 2.4%.
Walgreen’s domestic retail pharmacy division was the biggest contributor the business, with revenues of $21.5 billion. That was up 2.1% from a year earlier. But it is the comparable store numbers that really matter. The comparable drugstore sales increased 2.2%.
Robust Pharmacy Sales
The other important area of sales is in the pharmacy itself, which accounts for two-thirds of this division’s total sales. That was not only up 3.2% but comps rose 3.7%. That is a very solid number, and I suspect it will only get better as drug prices increase.
Walgreens’ international retail pharmacy, as a division, had strong sales of $3.6 billion. The good news came here as well, because after backing out those currency issues, comps rose 2.3%. My big concerns with drugstores has been the loss of business to places like Target (NYSE: TGT) and dollar stores. However, the comps increasing shows that this is not the case right now.
I mentioned that management was cutting costs and getting more efficient at the operational level, so one would hope that would translate to better margins. That was somewhat true, with gross margin increasing by 0.4% on a reported basis. Gross profit was up 15% to $7.94 billion and adjusted operating income was up 23% to $2.09 billion. Margins improved here also, by 0.5%.
The Debt Question
The other big concern I’ve had with these acquisitions was debt. Drugstores had been struggling with it. However, the consolidation seems to have worked out a little better than I thought it would. Walgreens has $3.5 billion in cash against $13 billion in debt.
That sounds like a large amount of debt, and it is, to be honest. However, the key to understanding how manageable debt is depends on free cash flow. Walgreens had $2.1 billion in the quarter alone, which is over $8 billion on an annual basis. That makes the debt load a non-story.
Walgreens Guides Higher
Walgreens also boosted guidance a bit, aiming now for EPS of $4.35 to $4.55. At Tuesday’s closing price of $83, that means it trades at about 19x earnings.
I have to say, that’s a rich valuation in the absolute. However, with analysts projecting 13.32% annualized growth, plus a 1.66% dividend yield, plus a premium for its size and free cash flow, that’s not an entirely unreasonable valuation. I’d prefer to pay a bit less, but those looking to hold a drugstore behemoth for the long term may find this to be a reasonable price at which to enter.
This Is Making Ordinary People Rich
Ordinary people across America are getting insanely rich. Take Gladys Holm. She never earned more than $15,000 a year as a secretary. But by making one simple move, she was able to leave an $18 million fortune to a children’s hospital when she died. There’s many more just like her.