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Walgreens in Fiscal 2Q16: An Earnings Beat and a Miss on Revenues

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Part 3
Walgreens in Fiscal 2Q16: An Earnings Beat and a Miss on Revenues PART 3 OF 4

How Did Walgreens Manage to Beat on Earnings Yet Again?

EPS in fiscal 2Q16

In fiscal 2Q16, which ended February 29, 2016, Walgreens Boots Alliance (WBA) beat Wall Street’s earnings estimate for the sixth consecutive quarter. The company reported an 11% YoY (year-over-year) increase in EPS (earnings per share) to $1.31 in 2Q16, topping the estimate by $0.03. The company’s better-than-expected earnings were a result of the Alliance Boots consolidation and the company’s ongoing cost-control initiatives.

How Did Walgreens Manage to Beat on Earnings Yet Again?

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Speaking of WBA’s performance in fiscal 2Q16, Stefano Pessina, Walgreens’s executive vice chairman and CEO (chief executive officer), said, “I am pleased with how we are working across the company to transform our businesses and position ourselves for success in rapidly changing markets. In addition, we continued to make good progress in the quarter in reducing costs and establishing more efficient working practices, which contributed to overall adjusted earnings growth. Looking ahead, we remain on track to achieve our expectations for this fiscal year, as we work to mitigate lower pharmacy reimbursement rates and challenging retail sales environments.”

A Look at profit and margins in 2Q16

WBA’s gross profit increased 15.4% in fiscal 2Q16 to $7.9 billion. Following are the results by division:

  • Retail Pharmacy USA Division: gross margin increase of 10 basis points to 27.7%, primarily due to procurement efficiencies
  • Retail Pharmacy International Division: adjusted gross profit of $1.5 billion with an adjusted gross margin of 41.1%
  • Pharmaceutical Wholesale Division: adjusted gross profit of $535 million with adjusted gross margin of 9.5%, similar to the last three quarters

WBA reported a 12-basis-point increase in operating margin to 6.9%. The increase was driven by store efficiencies and controlled corporate costs in its Retail Pharmacy USA Division. It was also driven by the inclusion of the seasonally stronger month of December in the current year’s financials for the Retail Pharmacy International Division.

WBA’s trailing 12-month operating margin stands at 4.8% compared to 6.2% for CVS Health (CVS), 1.8% for McKesson (MCK), and 0.23% for Amerisource Bergen (ABC).

Investors seeking to add exposure to WBA can consider the ProShares Ultra QQQ ETF (QLD), which invests 1.4% of its portfolio in WBA.

In the final part of our series, we’ll look at Walgreens’s shareholder returns and valuations.

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