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DEERFIELD, Ill. —Walgreens Boots Alliance Inc.’s third quarter earnings missed projections and the company cut its full-year profit outlook.
Citing a “difficult” environment for shoppers and pharmacies, WBA announced plans to shutter a ‘significant’ number of underperforming stores.
Tim Wentworth
Adjusted earnings per share of 63 cents for the period ended May 31 fell short of Wall Street’s predicted 68 cents, and the company lowered its outlook for full-year adjusted earnings to $2.80 to $2.95 per share. The previously issued outlook was $3.20 to $3.35.
Third quarter revenue of $36.4 billion topped analysts’ estimated 35.94 billion, as the U.S. Healthcare segment lifted sales.
“We continue to face a difficult operating environment, including persistent pressures on the U.S. consumer and the impact of recent marketplace dynamics which have eroded pharmacy margins,” said CEO Tim Wentworth. “Our results and outlook reflect these headwinds, despite solid performance in both our International and U.S. Healthcare segments.
“Informed by our strategic review, we are focused on improving our core business: retail pharmacy, which is central to the future of healthcare. We are addressing critical issues with urgency and working to unlock opportunities for growth. Many of these actions will take time, but I am confident that we have the right team and the right strategy to lead a business turnaround for the Walgreens that our customers and patients need.”
Overview of Third Quarter Results
Sales increased 2.6 percent from the year-ago quarter, an increase of 2.5 percent on a constant currency basis, reflecting sales growth across all segments.
Third quarter operating income was $111 million compared to an operating loss of $477 million in the year-ago quarter, an increase of $588 million, which reflects lapping a $431 million non-cash impairment of pharmacy license intangible assets in Boots UK in the year-ago quarter. Adjusted operating income** was $613 million, a decrease of 36.3 percent on a constant currency basis reflecting lower sale-leaseback gains and softer U.S. retail and pharmacy performance, partly offset by cost savings initiatives and improved profitability in the U.S. Healthcare segment.
Net earnings in the third quarter were $344 million compared to net earnings of $118 million in the year-ago quarter, an increase of $225 million reflecting higher operating income. Adjusted net earnings** were $545 million, down 36.5 percent on a constant currency basis, reflecting lower adjusted operating income**.
EPS in the third quarter was $0.40 compared to $0.14 in the year-ago quarter, reflecting an increase of $0.26. Adjusted EPS was $0.63, reflecting a decrease of 36.6 percent, or $0.36 on both a reported and constant currency basis.
Net cash provided by operating activities was $605 million in the third quarter and free cash flow** was $334 million, a $778 million increase compared with the year-ago quarter, each driven primarily by phasing and optimization of working capital. The increase in free cash flow also benefited from decreased capital expenditures.
Overview of Fiscal 2024 Year-to-Date Results
Sales in the first nine months of fiscal 2024 increased 6.2 percent from the year-ago period to $110.1 billion, an increase of 5.6 percent on a constant currency basis, reflecting growth across all segments.
Operating loss in the first nine months of fiscal 2024 was $13.1 billion compared to an operating loss of $6.4 billion in the year-ago period, an increase in operating loss of $6.7 billion. Operating loss in the current period reflects a $12.4 billion non-cash impairment charge related to VillageMD goodwill, which resulted in a $5.8 billion charge attributable to WBA, net of tax and non-controlling interest. Operating loss in the current period also reflects a $455 million non-cash impairment charge related to certain long-lived assets in the U.S. Retail Pharmacy segment. Prior year operating loss reflects a $6.8 billion pre-tax charge for opioid-related claims and litigation and a $431 million non-cash impairment of pharmacy license intangible assets in Boots UK. Adjusted operating income** was $2.2 billion, a decrease of 31.5 percent on a constant currency basis reflecting a challenging U.S. retail environment, reimbursement pressure and lower sale-leaseback gains, partly offset by cost savings and improved profitability in the U.S. Healthcare segment.
Net loss for the first nine months of fiscal 2024 was $5.6 billion compared to a net loss of $2.9 billion in the year-ago period, an increase in net loss of $2.7 billion, reflecting the non-cash impairment charges and lapping a $1.5 billion gain on sales of Cencora and Option Care Health shares last year. Adjusted net earnings** decreased 24.9 percent, or $712 million to $2.2 billion, down 25.3 percent on a constant currency basis, reflecting lower adjusted operating income** partly offset by a lower adjusted effective tax** rate due to the recognition of deferred tax assets in foreign jurisdictions in the second quarter.
Loss per share for the first nine months of fiscal 2024 was $6.53 compared to a loss per share of $3.36 in the year-ago period, an increase in loss per share of $3.17. Adjusted EPS** decreased 24.9 percent, or $0.83, to $2.49, reflecting a decrease of 25.3 percent on a constant currency basis.
Net cash used for operating activities was $314 million in the first nine months of fiscal 2024 and free cash flow** was negative $1.1 billion, a $1.2 billion decrease compared with the year-ago period, with each driven primarily by lower earnings, $780 million in higher payments related to legal matters and phasing of working capital. The decrease in free cash flow was partly offset by $497 million in decreased capital expenditures.
The U.S. Retail Pharmacy segment had third quarter sales of $28.5 billion, an increase of 2.3 percent from the year-ago quarter driven entirely by comparable pharmacy sales, partly offset by a retail decline. Comparable sales increased 3.5 percent from the year-ago quarter.
Pharmacy sales increased 4.4 percent and comparable pharmacy sales increased 5.7 percent compared to the year-ago quarter, benefiting from higher branded drug inflation and script growth. Comparable prescriptions filled in the third quarter, adjusted to 30-day equivalents increased 1.6 percent from the year-ago quarter while comparable prescriptions excluding immunizations increased 1.7 percent. Total prescriptions filled in the quarter, including immunizations, adjusted to 30-day equivalents was 306.4 million, an increase of 0.5 percent versus the prior year quarter. Pharmacy margin was negatively impacted by brand mix impacts and reimbursement pressure.
Retail sales decreased 4.0 percent and comparable retail sales decreased 2.3 percent compared with the year-ago quarter, reflecting a challenging retail environment and continued channel shift. Retail margin was negatively affected by increased promotional activity and higher shrink levels.
Adjusted operating income** decreased 47.9 percent to $501 million compared to $1.0 billion in the year-ago quarter, reflecting lower sale and leaseback gains, a challenging retail environment and reimbursement pressure, net of procurement savings, partly offset by cost savings initiatives.
The International segment had third quarter sales of $5.7 billion, an increase of 2.8 percent from the year-ago quarter, including a favorable currency impact of 1.1 percent. Sales increased 1.6 percent on a constant currency basis, with the Germany wholesale business growing 4.9 percent and Boots UK sales growing 1.6 percent.
Boots UK comparable pharmacy sales increased 5.8 percent on a constant currency basis compared with the year-ago quarter. Boots UK comparable retail sales increased 6.0 percent on a constant currency basis compared to the year-ago quarter with growth across all categories, and increased total retail market share. Boots.com continued to perform strongly with sales growing 13.8 percent representing 15.6 percent of Boots total retail sales.
Adjusted operating income decreased 15.8 percent to $175 million, a decrease of 16.6 percent on a constant currency basis compared with the year-ago quarter, due to lapping real estate gains in the year-ago period.
The U.S. Healthcare segment had third quarter sales of $2.1 billion, an increase of 7.6 percent compared to the year-ago quarter, led by VillageMD and Shields. VillageMD grew 7 percent, reflecting additional lives in risk and fee-for-service. Shields grew 24 percent, driven by growth within existing partnerships.
Operating loss was $220 million compared to an operating loss of $522 million in the year-ago quarter. Adjusted operating loss**, which excludes certain costs related to amortization of acquired intangible assets and stock compensation expense, was $22 million compared to $172 million in the year-ago quarter.
Adjusted EBITDA** of $23 million improved by $136 million versus the prior year quarter and represents the second consecutive quarter of positive adjusted EBITDA** for the segment, driven by cost discipline and growth from VillageMD and Shields.
