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Walgreens (WBA) Tops Q3 Earnings, Scraps Rite-Aid Deal

Walgreens Boots Alliance, Inc. WBA reported adjusted earnings per share (EPS) of $1.33 in third-quarter fiscal 2017, up 12.7% year over year. Adjusted EPS surpassed the Zacks Consensus Estimate of $ 1.31.

On a reported basis, net earnings came in at $1.2 billion, reflecting an increase of 5.3% from the prior-year quarter. Reported earnings came in at $1.07 per share, reflecting an improvement of 5.9% on a year-over-year basis.

Total Sales

Walgreens Boots recorded total sales of $30.11 billion in the fiscal third quarter, down 2.1% year over year and up 5% at constant exchange rate (CER). The top line outpaced the Zacks Consensus Estimate of $29.68 billion.

Following the earnings release, the company’s share price rose 4.03% during pre-market trading session.

Segments in Detail

Walgreens Boots currently reports under three operating segments: Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale.

The Retail Pharmacy USA division delivered sales of $22.5 billion in the reported quarter, reflecting an increase of 6.3% on a year-over-year basis. Within this segment, total sales at comparable drugstores rose 3.7%, while prescriptions filled in comparable stores grew 8.3% on account of Medicare Part D growth and volume growth from previously announced strategic pharmacy collaborations. On the other hand, comparable retail stores edged down 0.4% due to lower sales of consumables and general merchandise category and at the personal care category, partially offset by higher sales in the health and wellness and beauty categories.

Pharmacy sales, which accounted for 69.9% of the division’s sales in the quarter, increased 10.3% from the year-ago quarter, while pharmacy sales at comparable stores increased 5.8% on higher volumes.

Revenues at the Retail Pharmacy International division declined 10.3% on a year-over-year basis (down 0.2% at CER) to $2.8 billion, on account of currency fluctuations. At CER, comparable store sales in the third quarter increased 0.2% year over year, while comparable pharmacy sales fell 0.1% due to a reduction in government pharmacy funding in the U.K.

The Pharmaceutical Wholesale division recorded quarterly sales of $5.3 billion, down 7.9% year over year (up 3.7% at CER).

Margins

Gross profit in the reported quarter decreased 3.9% year over year to $7.14 billion. Accordingly, reported gross margin contracted a massive 147 basis points (bps) to 23.7%.

Selling, general and administrative (SG&A) expenses were down 3.2% year over year to $5.71 billion. Despite that, adjusted operating income decreased 6.3% to $1.43 billion owing to significantly lower gross profits. Accordingly, adjusted operating margin contracted 43 bps to 4.8%.

Financial Condition

Walgreens Boots ended the third quarter of 2017 with cash and cash equivalents of $12.25 billion, compared with $11.82 billion at the end of second-quarter fiscal 2017. Long-term debt was $14.37 billion at the end of the reported quarter, compared with $17.75 billion at the end of the second quarter of fiscal 2017.

Moreover, the company generated operating cash flow of $5.23 billion in the third quarter, up from $5.18 billion in the third quarter of fiscal 2016. The resultant free cash flow was $1.58 billion in the reported quarter, as compared with $1.85 billion in the year-ago quarter.

Guidance

Walgreens Boots raised the lower end of its guidance for fiscal 2017 by 8 cents and currently expects full-year adjusted earnings per share in the range of $4.98 to $5.08.The Zacks Consensus Estimate of $4.99 is within the guided range.

Progress on Rite Aid Acquisition

Walgreens Boots announced a new definitive agreement with Rite Aid Corporation under which the former will purchase 2,186 stores, three distribution centers and related inventory from the latter. This new contract replaces the previous merger agreement with Rite Aid, announced in Oct 2015 and amended in Jan 2017, and the agreement to divest certain Rite Aid stores to Fred’s, Inc. announced in Dec 2016. Walgreens Boots Alliance will pay Rite Aid the $325 million termination fee with respect to their merger deal as both the agreements have been terminated.

The consideration for the transaction will be $5.17 billion in cash, the assumption by Walgreens Boots Alliance of the related real estate leases and the grant of an option to Rite Aid, exercisable through May 2019 and subject to certain conditions.

Our Take

Walgreens Boots reported an impressive third-quarter fiscal 2017, with both earnings and sales surpassing the Zacks Consensus Estimate. However, declining sales at the Retail Pharmacy International and Pharmaceutical Wholesale divisions added to the disappointment. Also, the Federal Trade Commission’s (FTC) blocking of the Rite Aid merger is expected to drag investors’ sentiments down.

Zacks Rank and Key Picks

Walgreens Boots currently carries a Zacks Rank #3 (Hold).  A few better-ranked medical stocks are Align Technology, Inc. ALGN, Inogen, Inc. INGN and Accelerate Diagnostics, Inc. AXDX. Notably, Inogen sports a Zacks Rank #1 (Strong Buy), while Align Technology and Accelerate Diagnostics carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Align Technology has an expected long-term adjusted earnings growth of almost 24.1%. The stock has added roughly 33.6% over the last three months.

Inogen has a long-term expected earnings growth rate of 17.5%. The stock has gained around 22.5% over the last three months.

Accelerate Diagnostics has an expected long-term adjusted earnings growth of 30%. The stock has added roughly 15.8% over the last three months.

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