Why Walgreens’ Earnings Will Likely Decline in Q1

Walgreens Boots Alliance (WBA) will announce its earnings for the first quarter of fiscal 2020 before the markets open on January 8.

Walgreens’ earnings could continue to decline

While we expect Walgreens’ top line to improve, its earnings could continue to decline.

We think that continued pressure on margins from higher reimbursements will likely remain a drag. Walgreens faces tough YoY (year-over-year) comparisons, which could also pressure its first-quarter earnings.

Notably, Walgreens’ bottom line increased at a double-digit rate in the first quarter of fiscal 2019 due to the lower effective tax rate. However, the tax rate will likely be higher in the first quarter of 2020, which could hurt the company’s bottom line.

Cost-saving initiatives and share repurchases could support Walgreens’ first-quarter earnings.

Analysts’ expectations for Walgreens’ earnings

Analysts expect Walgreens to post revenues of $34.59 billion, which reflects YoY growth of 2.4%. The company’s top line will likely benefit from continued growth in the Retail Pharmacy USA segment due to increased pharmacy sales.

Higher prescription volumes and branded drug inflation could continue to support Walgreens’ top-line growth. However, retail sales could stay low. The company’s store optimization program and less emphasis on tobacco sales could continue to limit sales.

Also, Walgreens’ international sales could continue to decline, which would reflect persisting challenges in Boots UK. Lower script volumes and weakness in the UK market could remain a drag.

Walgreens’ profit margins could continue to decline due to higher reimbursements, which could take a toll on its earnings. A higher effective tax rate could play spoilsport. Analysts expect Walgreens to post an adjusted EPS of $1.41 in the fourth quarter. Analysts’ consensus estimate reflects a YoY decline of 3.4%. However, cost-savings and share buybacks could cushion the company’s bottom line.

Walgreens’ strategic initiatives to boost growth

Industry-wide challenges are impacting Walgreens’ top and bottom-line growth. As a result, the company is taking several strategic measures to accelerate growth. In Boots UK, Walgreens introduced beauty hauls in 26 key locations. The company is focusing on digitalization to support growth.

The company launched 18 new brands. Walgreens is working on digital healthcare plans to expand its pharmacy services. The company started the online pharmacy in May. While the initiatives could drive sales, the company is also focusing on reducing costs to drive margins in the UK.

In the US, Walgreens expanded its partnership with Kroger (KR). The Kroger Express concept will likely be extended to 50 Walgreens stores. Meanwhile, the company’s beauty and health brands will likely be available in 17 Kroger stores.

Walgreens extended its partnership with FedEx (FDX) to drive last-mile shipping and offer easy returns.

The company is optimizing its store base to reduce costs and drive higher productivity in the US and the UK.

Walgreens’ Q4 performance

Walgreens posted stronger-than-expected results in the fourth quarter. The company’s bottom line continued to decline due to reimbursement pressure. However, the earnings beat analysts’ expectations.

Walgreens posted an adjusted EPS of $1.43, which reflected a YoY decline of 3.7%. However, the EPS beat analysts’ estimate of $1.41. Walgreens’ revenues increased 1.5% YoY to $33.95 billion and beat the consensus estimate of $33.89 billion.

Analysts remain on the sidelines

Most analysts are still on sidelines on Walgreens stock before the first-quarter earnings. Among the 23 analysts, 19 recommend a “hold,” while four recommend a “sell.” Analysts have a target price of $57.11 on the stock, which implies a downside of 3.1% based on its closing price of $58.96 on Tuesday.