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Walgreens Stock Fell ~13% on Weak Q2 and Lower Guidance

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Key takeaways from Q2

Walgreens Boots Alliance (WBA) stock dropped 12.8% on Tuesday, April 2. Lower-than-expected second-quarter earnings and an EPS guidance cut irked investors. Walgreens’s top line improved 4.6% on a YoY basis thanks to the acquisition of Rite Aid stores. However, sales remained shy of analysts’ estimate, reflecting unfavorable currency rates and weakness in the Retail Pharmacy USA and UK segments.

Walgreens disappointed on the profitability front as well. Walgreens’s adjusted operating income decreased 10.4% on a YoY basis, reflecting higher reimbursement pressure exacerbated further by lower brand inflation and deflation in generics.

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Weaker-than-expected sales and lower profit margins took a toll on second-quarter earnings, which declined 5.4% on a YoY basis and missed analysts’ estimate. We believe that persisting sales and margin headwinds aren’t likely to abate and are anticipated to hurt the company’s financials in the near term. Walgreens’s management lowered its EPS guidance, expecting weakness in volumes in both the US and UK. Also, higher reimbursement pressure is projected to hurt the earnings growth rate.

Walgreens now expects its earnings to stay flat in fiscal 2019. Earlier, management expected its bottom line to grow 7% to 12% on a constant-currency basis.

Stock performance

Walgreens stock is down 19% on a YTD basis including yesterday’s 12.8% decline and has underperformed the benchmark index so far this year. In comparison, CVS Health (CVS), which faces similar reimbursement pressure, fell 20.4% on a YTD basis as of April 2.

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