Walgreens Boots’ Sales Decline Ahead of Rite Aid Merger

Drug retailer to sell 865 Rite Aid stores and certain assets to Fred’s Inc.

w1Walgreens Boots Alliance Inc. (NASDAQ: WBA) announced its Q1 FY17 financial results on January 05th, 2017.

The Deerfield, Illinois-based Company is the largest retail pharmacy chain in the US with presence in more than 25 countries and employs more than 400,000 people. The Company is a global leader in pharmacy-led retail and has over 13,200 stores in 11 countries as well as one of the largest global pharmaceutical wholesale and distribution networks, with over 390 distribution centers delivering to more than 230,000 pharmacies, doctors, health centers, and hospitals in more than 20 countries as of August 31st, 2016. The company operates through three segments: Retail Pharmacy USA, Retail Pharmacy International, and Pharmaceutical Wholesale.

The Retail Pharmacy USA segment sells prescription drugs and general merchandise through its retail drugstores and convenient care clinics. It also provides specialty pharmacy services and manages in-store clinics under the brand Healthcare Clinic.

w2The Retail Pharmacy International segment sells prescription drugs and other consumer products through its pharmacy-led stores, as well as through boots.com and BootsWebMD.com. It is also involved in optical practice and related contract manufacturing operations. This segment operated 4,582 retail stores under the No7, Boots Pharmaceuticals, Botanics, Liz Earle, Soap & Glory, and only at Boots brand names in the UK, Mexico, Chile, Thailand, Norway, the Republic of Ireland, the Netherlands, and Lithuania; and 637 optical practices in the UK.

The Pharmaceutical Wholesale segment is involved in the wholesale distribution of specialty and generic pharmaceuticals, health and beauty products, and equipment. It also provides services to pharmacies and other healthcare providers. Read more about Walgreens Boots’ financial results below.

Q1 FY17 financial highlights

Walgreens Boots Alliance’s Q1 FY17 net sales declined 1.8% Y-o-Y to $28.5 billion, and grew 1.1% on a constant currency basis. GAAP operating income fell 1.4% Y-o-Y to $1.4 billion during the reporting quarter. Adjusted operating income in Q1 FY17 grew 0.4% to $1.7 billion, and increased 2.8% on a constant currency basis.

In all, Walgreens Boots Alliance’s GAAP Q1 FY17 net earnings fell 5% to $1.1 billion compared to the year-ago same period, while GAAP diluted net EPS decreased 4% to $0.97 compared to the same quarter a year ago. The decreases in GAAP net earnings and GAAP net EPS reflect a lower impact of UK tax rate reductions. Adjusted net earnings grew 6.1% to $1.2 billion, and were up 8.2% on a constant currency basis compared to the year-ago comparable period. Adjusted diluted net EPS for the quarter rose 6.8% to $1.10, and was up 9.7% on a constant currency basis, compared with the same quarter a year ago.

During the reporting quarter, GAAP net cash provided by operating activities was $525 million and free cash flow was at $147 million.

Segmental highlights

Retail Pharmacy USA: This segment’s Q1 FY17 sales grew by 1.4% to $20.7 billion. Comparable store sales rose 1.1% versus the year-ago corresponding period. Pharmacy sales, which accounted for 69.1% of the division’s sales in the quarter, grew 2.5% compared to the year-ago same quarter. Comparable pharmacy sales increased 2.0%. The division filled 237.6 million prescriptions (including immunizations) adjusted to 30-day equivalents in the quarter, an increase of 3.0% over Q1 FY16. Prescriptions filled in comparable stores grew 3.4% compared to the year-ago same period, primarily due to continued growth in Medicare Part D volume. Growth in comparable sales resulted from increased pharmacy volume and brand inflation, partially offset by reimbursement pressure and the impact of generics.

During Q1 FY17, retail sales fell 0.9% Y-o-Y and include the impact of the closure of certain ecommerce operations. Comparable retail sales were down 0.5% due to declines in the consumables and general merchandise category and in the personal care category, and partially offset by increases in the health and wellness category and beauty category. Since the end of Q1 FY17, the Company has completed the first phase of the rollout of its new, differentiated beauty offering in more than 1,800 stores.

During Q1 FY17, GAAP gross profit fell 0.1% from the year-ago same quarter, while adjusted gross profit increased 0.1% due to the company’s previously announced $1.5 billion cost transformation program. GAAP operating income during the reporting quarter jumped 7.5% to $1.1 billion. Adjusted operating income grew 3.7% to $1.3 billion from Q1 FY16.

Retail Pharmacy International: This segment’s Q1 FY17 sales fell 14.4% Y-o-Y to $3 billion due to the negative impact of currency translation. Sales increased 0.5% on a constant currency basis. On a constant currency basis, comparable store sales decreased 0.1% compared to the year-ago corresponding quarter.

During Q1 FY17, comparable pharmacy sales declined 0.5% on a constant currency basis, primarily due to a reduction in government pharmacy funding in the UK, but partially offset by growth in other international markets. Comparable retail sales increased 0.2% on a constant currency basis, reflecting growth in all countries except Chile and Mexico.

During Q1 FY17, GAAP gross profit fell 17.4% versus the year-ago period, largely due to currency translation. On a constant currency basis, adjusted gross profit decreased 2.7%, primarily due to lower margins in the U.K. GAAP operating income plunged 39.7% from the year-ago quarter to $182 million, while adjusted operating income nosedived 32.4% to $213 million, and was down 21.6% on a constant currency basis.

Pharmaceutical Wholesale: This segment’s Q1 FY17 sales slipped 6.5% Y-o-Y to $5.4 billion. On a constant currency basis, comparable sales increased 4.7%, which was slightly ahead of the Company’s estimate of market growth weighted on the basis of country wholesale sales. GAAP operating income in Q1 FY17 was $160 million compared to $143 million in from Q1 FY16. Adjusted operating income jumped 34.9% to $224 million, and was up 45.2% on a constant currency basis.

Other highlights

Rite Aid acquisition: Walgreens Boots Alliance announced on October 27th, 2015, that it has agreed to acquire Rite Aid Corp. (NYSE: RAD) for $17.2 billion. The combination of Walgreens and Rite Aid would create the largest pharmacy chain in the US with more than 12,800 stores across the US and would give Walgreens’ 40%-50% market share, much more than that of rival CVS Health Corp. (NYSE: CVS).

Rite Aid, the third largest drugstore chain in the US, operated 4,560 stores in over 31 states in the US and in the District of Columbia as of as of May 28th, 2016, enabling Walgreens Boots Alliance to tap many synergies and cut costs, while expanding its footprint.

Source: Metro Market Studies and Barclays Research
Source: Metro Market Studies and Barclays Research

On December 20th, 2016, Walgreens Boots Alliance and Rite Aid announced that they have entered into an agreement to sell 865 Rite Aid stores and certain assets related to store operations to Fred’s Inc. (NASDAQ: FRED) for $950 million in an all-cash transaction. The transaction is subject to Federal Trade Commission (FTC) approval, the approval and completion of the pending acquisition of Rite Aid by Walgreens Boots Alliance, and other customary closing conditions.

Walgreens Boots Alliance is working to close the Rite Aid acquisition in the early part of calendar 2017. The proposed divestiture transaction, if approved, would establish Fred’s Pharmacy as one of the largest drugstore chains in the US with significant presence in areas such as the South and on the East and West Coasts. Fred’s Pharmacy would continue to operate the acquired stores under the Rite Aid banner during a transition period. If the FTC requires divestiture of more than the 865 Rite Aid stores currently contemplated by the purchase agreement and Walgreens Boots Alliance agrees to sell such stores, the purchase agreement requires Fred’s to purchase such additional stores.

Walgreens Boots Alliance continues to expect that it will realize synergies from the acquisition of Rite Aid in excess of $1 billion, to be fully realized within three to four years of closing of the merger. These synergies are expected to be derived primarily from procurement, cost savings and other operational matters.

Guidance for FY17

Walgreens Boots Alliance raised the lower end of its guidance for FY17 by $0.05 cents per share and now anticipates adjusted diluted net EPS of $4.90 to $5.20. This guidance assumes accretion of $0.05 to $0.12 from Rite Aid and is based on expected store divestitures and timing of closing. Additionally, this guidance assumes current exchange rates for the rest of the fiscal year and continuation of its normal anti-dilutive share buyback program.

Stock Performance

w4Walgreens Boots Alliance’s stock stood at $83.10, inching up 0.08%, at the close on Friday, January 06th, 2016, having vacillated between an intraday high of $83.69 and a low of $82.45 during the session. The stock’s trading volume was at 3,949,940 for the day. The Company’s market cap was at $89.60 billion as of Friday’s close.

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