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What to Expect from Walgreens Boots Alliance's 2Q16 Results

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Part 3
What to Expect from Walgreens Boots Alliance's 2Q16 Results PART 3 OF 6

How Were WBA’s Margins and Profitability in 1Q16?

WBA registered solid EPS growth in 1Q16

Walgreens Boots Alliance (WBA) reported a 32.1% YoY increase in its earnings per share to $1.03 in 1Q16, beating the Wall Street estimates by $0.07. The strong earnings performance was a result of the Alliance Boots consolidation and the company’s ongoing cost control initiatives in the Retail Pharmacy USA division.

How Were WBA&#8217;s Margins and Profitability in 1Q16?

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Gross profit rose on Alliance Boots consolidation

WBA’s gross profit rose 41% during the quarter to $7.5 billion. Around 7% of the increase was attributable to the Retail Pharmacy USA division while the rest came from the inclusion of Alliance Boots’ consolidated results.

The Retail Pharmacy USA division’s gross profit increased 2.8% YoY during the quarter. Adjusted gross margin fell 30 basis points and stood at 27% in 1Q16. The reduction was primarily due to lower pharmacy reimbursement rates, an increase in Medicare Part D prescriptions, and the mix of specialty medications.

The Retail Pharmacy International division had the highest gross margin rate. Gross margin for this segment stood at 42.6% while that of the Wholesale division stood at 9.6%.

Cost savings initiatives boost operating margin

WBA’s Retail Pharmacy USA division’s SG&A expenses were down 2.1% YoY during the quarter. The company attributed this reduction to the company’s cost-savings programs under which the company aims to achieve $1.5 billion of cost savings by the end of fiscal 2017. As a result, adjusted operating income for the segment was up 11.2% and stood at $1.2 billion. Operating margin stood at 5%.

The Retail Pharmacy International division, which accounted for around 20% of the company’s operating income, reported an operating margin of 8.7% during the quarter. Operating income for the Pharmaceutical Wholesale segment stood at $143 million while its operating margin was 2.7%. Overall, the company’s operating margin grew by 80 basis points as compared to the first quarter and stood at 5.9%.

Comparing profitability with peers

WBA has a trailing-12-month operating margin of 5.7%. WBA trails CVS Health (CVS) in terms of profitability. CVS recorded an operating margin of 6.2% over the last 12 months and an average operating margin of 6.1% over the last five years. McKesson (MCK) and AmeriSourceBergenis (ABC) have higher sales growth than WBA, but trail WBA in terms of profitability. Operating margins of these two companies were 1.8% and 0.23% over the last 12 months, respectively. ETF investors seeking to add exposure to WBA can consider the ProShares Ultra QQQ ETF (QLD), which invests 1.4% of its portfolio in WBA.

Move on to the next section to read about the company’s recent initiatives and future plans.

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