What’s in Store for Walgreens Boots (WBA) in Q2 Earnings?

Walgreens Boots Alliance, Inc WBA is slated to release second-quarter 2017 results, before the market opens on Apr 5.

Last quarter, the company posted a positive earnings surprise of 0.92%. In fact, in the last four quarters, Walgreens Boots’ earnings outpaced the Zacks Consensus Estimate, leading to an average beat of 3.92%. Let’s see how things are shaping up prior to this announcement.

Factors at Play

While Walgreens Boots’ last-reported first-quarter 2017 revenue figure was unimpressive, management hopes to witness strong top-line growth in the upcoming second quarter on implementation of the company’s new strategic partnership model.

Walgreens Boots is currently collaborating with WPP to operate and develop multiple marketing and communications channels for its retail and wholesale businesses as well as its health and beauty product brands. The company also recently inked a multi-year partnership agreement with global express delivery services provider FedEx Corporation. These alliances are expected to prove beneficial for the company’s top-line performance.

In this regard we note that, management had earlier raised the lower end of its earnings guidance for fiscal 2017 by 5 cents per share and anticipates adjusted EPS in the range of $4.90–$5.20. This narrowed earnings outlook raises confidence about the stock’s performance.

Meanwhile, the company continues to focus on strategic programs such as skin product launch and vaccination program which are expected to reap benefits in the forthcoming quarter. In the first-quarter earnings report, management announced plans to expand the beauty offerings in a number of stores in the upcoming quarters.

Notably, management is carrying out its 2017 three-year plan to improve its core performance and boost shareholders’ value. The plan also includes a multi-faceted cost-reduction initiative. Walgreens Boots has witnessed a drop in its operating expenses in the last reported quarter. We hope this cost transformation program will also reflect in the second quarter 2017 earnings release.

On the flip side, a difficult gross margin scenario owing to rising reimbursement pressure and generic drug cost inflation may affect results. This apart, a competitive landscape and macroeconomic instability continue to be major headwinds. Above all, Walgreens Boots expects a shift in the mix of pharmacy prescription volume toward programs offering lower reimbursement rates which might affect its operational results in the days ahead.

Additionally, the company’s impending buyout of Rite Aid is getting delayed. Both Walgreens Boots and Rite Aid have agreed to postpone the deal closure from Jan 27, 2017 to Jul 31, 2017 to gain additional time for regulatory approval. Notably, FTC has imposed certain regulatory restrictions which have delayed the completion of the Rite Aid acquisition. We currently await the integration of Rite Aid into Walgreens Boots’ business model which should expand its footprint in the U.S. in the near term.

Estimate Revision

Please note that Walgreen Boots has seen one upward revision and one downward revision over the last 30 days. On the contrary, the magnitude of the trend has inched up 0.7% over the same time frame. This mixed trend justifies the stock’s Zacks Rank #3 (Hold).

Earnings Whispers

Our proven model does not conclusively show that Walgreens Boots is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 for this to happen. However, that is not the case here, as you will see below.

Zacks ESP: Walgreens Boots has an Earnings ESP of -0.74%. That is because the Most Accurate estimate is pegged at $1.35 while the Zacks Consensus Estimate is at $1.36. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Walgreens Boots’ Zacks Rank #3 increases the predictive power of ESP. However, the company’s negative ESP makes surprise prediction difficult.

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies you may consider as our model shows that they have the right combination of elements to post an earnings beat in the upcoming quarter:

Inogen, Inc. ALGN has an Earnings ESP of +8.33% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Hill-Rom Holdings Inc HRC has an Earnings ESP of +1.27% and a Zacks Rank #2.

Syros Pharmaceuticals, Inc. SYRS has an Earnings ESP of +18.03% and a Zacks Rank #2.

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