DEERFIELD, Ill. — Adjusted earnings at Walgreen Co. were in line with Wall Street’s forecast for the fiscal 2014 fourth quarter and full year, with the drug chain seeing robust sales gains in both periods.
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For the fourth quarter, however, Walgreens reported a net loss, according to generally accepted accounting principles (GAAP), because of a large noncash charge resulting from its decision to proceed with its purchase of the remaining interest in Alliance Boots GmbH earlier than planned.
Walgreens said Tuesday that for the fourth quarter ended Aug. 31, adjusted net income totaled $714 million, or 74 cents per diluted share, compared with $702 million, or 73 cents per diluted share, a year earlier. The company noted that earnings adjustments in the 2014 quarter had a net positive impact of $953 million, or 99 cents per diluted share.
Analysts, on average, projected Walgreens’ fourth-quarter adjusted earnings per share (EPS) at 74 cents, with estimates ranging from a low of 65 cents to a high of 80 cents, according to Thomson Financial.
On a GAAP basis, Walgreens recorded a net loss of $239 million, or 25 cents per diluted share, in the fiscal 2014 fourth quarter compared with net earnings of $657 million, or 69 cents per diluted share, a year ago. The company said the 2014 quarter was negatively impacted by a noncash loss of $866 million, or 90 cents per diluted share, from the amendment and exercise of its Alliance Boots call option.
Walgreens exercised its option to buy the rest of Alliance Boots on Aug. 5, although under the original agreement the U.S. drug chain had until about mid-2015 to do so. Walgreens has said it expects to close that transaction, the second step of the companies’ two-part agreement, in the first quarter of calendar 2015.
Revenue in the 2014 fourth quarter rose 6.2% to nearly $19.1 billion from about $17.9 billion a year earlier. Same-store sales were up 5.4%, reflecting gains of 1.3% in the front end and 7.8% in the pharmacy. Customer traffic in comparable stores fell 2.2%, though basket size grew 3.5%.
Prescription sales, which represented 65.7% of fourth-quarter sales, climbed 9.3%. Walgreens filled 211 million prescriptions in the quarter, up 4.2% from the prior-year period. Prescription count in comparable stores increased 3.9%.
"Our fourth-quarter performance was in line with our expectation, recognizing we have much more to do," Walgreens president and chief executive officer Greg Wasson said in a statement. "We closed the fiscal year by exercising the option for the second step of our strategic transaction with Alliance Boots, completing the transition of our pharmaceutical distribution to AmerisourceBergen and driving continued improvement in our daily living business that resulted in our largest year-over-year quarterly and fiscal-year sales increases in three years.
"While continuing to work through pharmacy margin pressure, we were able to achieve improved top-line pharmacy growth as our retail pharmacy market share for the fiscal year increased 30 basis points to 19%," Wasson added. "Finally, we maintained solid expense control in the fourth quarter and are moving forward with the implementation of our previously announced cost-reduction initiative to achieve $1 billion in savings by the end of fiscal 2017."
For fiscal 2014, adjusted net earnings came in at $3.2 billion, or $3.28 per diluated share, compared with $3 billion, or $3.12 per diluted share, in fiscal 2013. Walgreens said earnings adjustments for fiscal 2014 had a net positive impact of $1.2 billion, or $1.28 per diluted share.
The consensus analyst estimate was for adjusted EPS of $3.29, with projections running from a low of $3.19 to a high of $3.48, according to Thomson Financial.
Walgreens’ GAAP net earnings for fiscal 2014 were $1.9 billion, or $2 per diluted share, versus $2.5 billion, or $2.56 per diluted share, a year earlier.
On the sales side, Walgreens’ fiscal 2014 revenue grew 5.8% to a record $76.4 billion from $72.2 billion in fiscal 2013. The retailer’s Balance Rewards loyalty program totaled 82 million active members as of Aug. 31.
For fiscal 2014, Walgreens said it filled a record 856 million prescriptions. The company noted that it continued to see strong growth in prescriptions filled for Medicare Part D patients, which rose 9.2% in the fourth quarter. And since the start of fiscal 2013, Walgreens said, the company’s Medicare Part D prescription market share has risen more than twice as fast as its overall retail prescription market share.
In fiscal 2014, Walgreens added a net of 21 new drug stores in addition to 70 net new stores via acquisitions. As of Aug. 31, Walgreens operated 8,207 drug stores.
Walgreens reported that combined synergies from the Alliance Boots partnership in fiscal 2014 were $491 million, and Walgreens estimated fiscal 2015 synergies at $650 million. Walgreens said Alliance Boots contributed 6 cents per diluted share to its fiscal 2014 fourth-quarter adjusted net earnings. For the fiscal 2015 first quarter, Walgreens projects that Alliance Boots will contributed adjusted EPS of 10 cents to 11 cents.
"Growth in fiscal 2015 will depend on the severity of certain headwinds, including
continued generic cost inflation, a stepdown in Medicare Part D rates beginning
Jan. 1 and other reimbursement pressure," William Blair & Co. analyst Mark Miller wrote in a research note Tuesday on Walgreens’ fiscal 2014 fourth-quarter and full-year results. "Tailwinds include new generic introductions, closing of step two of the Alliance Boots transaction (calendar first quarter), front-end margin expansion and cost-savings initiatives."
