Walgreens Boots’ Sales Stung by Currency Pressure

Drug retailer achieves goal to reach at least $1 billion in combined net synergies in FY16

Source: Company's Website
Source: Company’s Website

Walgreens Boots Alliance Inc. (NASDAQ: WBA) announced its Q3 FY16 financial results on July 6th, 2016. The Deerfield, Illinois-based Company is the largest retail pharmacy chain in the U.S. and 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. As of August 31st, 2015, this segment operated 8,173 retail stores under the Walgreens and Duane Reade brands in the U.S., 7 specialty pharmacy locations, and managed 400 Healthcare Clinics.

Source: Company's Website
Source: Company’s Website

The 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 U.K., Mexico, Chile, Thailand, Norway, the Republic of Ireland, the Netherlands, and Lithuania; and 637 optical practices in the U.K.

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.

Q3 FY16 financial highlights

Walgreens Boots Alliance’s Q3 FY16 net sales grew 2.4% to $29.5 billion, versus forecasts of $29.71 billion as compared to the year-ago period. Net sales on a constant currency basis grew by 3.3% during the quarter under review. Despite this, the Company could not meet its margin expectations for Q3 FY16 due to reimbursement pressures, insignificant contributions from sourcing benefits, and the decline in Gx inflation.

For Q3 FY16, the Company’s GAAP net earnings decreased 15.3% to $1.1 billion compared with the year-ago quarter, while GAAP net earnings per diluted share decreased 14.4% to $1.01 billion compared with the same quarter a year ago. These decreases are due to the changes in the quarterly fair value adjustments of the company’s AmerisourceBergen Corporation warrants.

On the other hand, the Company’s adjusted net earnings jumped 14.7% to $1.3 billion compared with the year-ago quarter, while adjusted net earnings per diluted share rose 15.7% to $1.18 compared with the same quarter a year ago. These increases were driven by costs cuts, as well as higher sales of Medicare Part D drugs and non-pharmacy products in the U.S.

For the quarter under review, Walgreens Boots Alliance’s combined net synergies were $330 million and $947 million in the first nine months of FY16. In June 2016, the Company achieved its goal set in 2012 to reach at least $1 billion in combined net synergies in FY16 relating to its merger with Alliance Boots. GAAP operating cash flow totaled $2.1 billion in Q3 FY16, while the Company generated free cash flow of $1.9 billion during the quarter.

Walgreens Boots Alliance’s revenue and profit from its international business, which includes Boots the Chemist in the U.K., could face currency pressure if the pound sterling keeps falling since mainland Europe accounted for 11% of revenue and the U.K. for 9% in the 12 months ended August 2015. The fall in the value of the pound could more than offset any sales gains in local currency.

Rite Aid acquisition

Walgreens Boots Alliances announced on October 27th, 2015, that it has agreed to acquire Rite Aid Corp. (NYSE: RAD) for $17.2 billion. The proposed deal, which is pending approval by antitrust regulators, is expected to be completed in the second half of 2016. The combination of Walgreens and Rite Aid would create the largest pharmacy chain in the U.S. with more than 12,800 stores across the U.S.

Rite Aid, the third largest drugstore chain in the U.S., operated 4,560 stores in over 31 states in the U.S. 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.

It now remains to be seen how many stores Walgreens Boots Alliance will have to divest to gain regulatory approval for the Rite Aid’s acquisition. Walgreens Boots Alliance will likely need to sell 170-500 stores to a Federal Trade Commission (FTC) approved list of buyers, which would give Walgreens’ 40-50% market share, much more than that of rival CVS Health Corp. (NYSE: CVS).

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

Guidance for FY16

Walgreens Boots Alliance raised the lower end of its guidance for FY16 by $0.10 per share and now anticipates adjusted net earnings per diluted share to range between $4.45 and $4.55. This guidance assumes no impact from the proposed acquisition of Rite Aid and related financing, and assumes current exchange rates for the rest of the fiscal year.

Stock Performance

W4Walgreens Boots Alliance’s stock stood at $82.01, inching up 0.26%, at the close on Monday, July 11th, 2016, having vacillated between an intraday high of $82.31 and a low of $81.67 during the session. The stock’s trading volume was at 3,602,766 for the day. The Company’s market cap was at $87.35 billion as of Monday’s close.

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