Walgreen Co. (WAG) reported adjusted net earnings of 74 cents per share in the fourth quarter of fiscal 2014, up 1.4% from the year-ago adjusted number but merely in line with the Zacks Consensus Estimate.
On a reported basis, net loss came in at $239 million or loss of 25 cents per share, a huge slash from the year-ago net earnings of $657 million or 90 cents per share. The bottom line in the reported quarter was impacted by $866 million or 90 cents per share non-cash loss on the amendment and exercise of the company’s Alliance Boots call option.
For the full year, adjusted net earnings came in at $3.28, up 5.1% year over year but a penny below the Zacks Consensus Estimate.
As reported in the company’s August sales release, Walgreens’ total sales reached $19.06 billion in the fourth quarter of fiscal 2014, recording sales growth of 6.2% year over year and a marginal beat over the Zacks Consensus Estimate of $19.01 billion. Fiscal 2014 total revenue was pegged at $76.39 billion, an improvement of 5.8% year over year, ahead of the Zacks Consensus Estimate of $76.33 billion.
Quarter in Detail
Front-end comparable store (those open for at least a year) sales and basket size grew 1.3% and 3.5%, respectively, in the quarter. On the other hand, customer traffic in comparable stores was down 2.2%. Overall, comparable store sales improved 5.4%.
Prescription sales (accounting for 65.7% of total sales in the quarter) climbed 9.3% over the prior-year quarter, while prescription sales in comparable stores increased 7.8%. Moreover, Walgreens filled 211 million prescriptions (up 4.2% year over year) during the reported quarter.
Prescriptions filled at comparable stores rose 3.9%. In addition, prescriptions filled for Medicare Part D patients witnessed a solid growth of 9.2% in the reported quarter. Walgreens Medicare Part D prescription market share has grown more than twice as fast as its overall retail prescription market share since the beginning of fiscal 2013.
The company’s Balance Rewards loyalty program had a count of 82 million active members at the end of the fourth quarter.
Margins
Gross profit increased 2.6% year over year to $5.32 billion. However, as expected, gross margin contracted 98 basis points (bps) to 28.0% as pharmacy gross profit was negatively impacted by lower third-party reimbursement and generic drug price inflation, partially offset by an increase in the brand-to-generic drug conversions. However, as expected, both pharmacy and front-end margins were driven by purchasing synergies from the company’s joint venture with Alliance Boots. The LIFO provision was $132 million in this fiscal versus $239 million last year.
Selling, general and administrative (SG&A) expenses scaled up 4.8% to $4.5 billion. Operating margin contracted 67 bps to 4.4%.
The company opened/acquired 46 stores in the reported quarter, up from 33 in the year-ago quarter. As of Aug 31, 2014, the company operated in 8,309 locations in 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands, including 8,207 drugstores (91 more compared with the year-ago period). The company also operates infusion and respiratory services facilities, specialty pharmacies and mail service facilities, and manages more than 400 Healthcare Clinic and provider practice locations around the country.
Financial Condition
Walgreens exited the fiscal with cash and cash equivalents of $2.64 billion, up from $2.11 billion as of Aug 31, 2013. Long-term debt was $3.7 billion in the reported quarter, compared with $4.5 billion as of Aug 31, 2013.
Moreover, the company has generated full year operating cash flow of $3.89 billion compared with $4.3 billion in the same period last year.
Alliance Boots Deal Update
So far, Walgreens’ partnership with Alliance Boots has been yielding positive results, with combined synergies reaching $491 million in fiscal 2014. Moreover, Alliance Boots contributed 6 cents per share to Walgreens’ fourth-quarter fiscal 2014 adjusted net earnings.
The company expects this joint synergy program to deliver approximately $650 million in fiscal 2015. The company estimates accretion from Alliance Boots in the first quarter of fiscal 2015 to be in the range of 10 to 11 cents per share (on an adjusted basis, including a 2-cent benefit related to Alliance Boots’ acquisition of its partner’s interest in a joint venture).
Our Take
Walgreens reported a mixed fiscal fourth quarter with in-line earnings and a marginal beat on the top-line front. The generic wave in the pharmaceutical industry remains a threat to revenues. This is also reflected in the company's quarterly sales figure.
Nonetheless, Walgreens is poised to generate higher profits from escalating sales of higher-margin generic drugs. The company is also positioned on a healthy dividend growth track. Further, the customer loyalty program is gaining traction as reflected in increasing registrations. This should improve customer traffic for Walgreens going forward.
We currently look forward to synergies from the Alliance Boots deal expected in fiscal 2015. The deal with AmerisourceBergen, likely to create a leader in the generic and branded drug purchasing space, is another major upside.
Walgreens currently has a Zacks Rank #3 (Hold). While we choose to remain on the sidelines regarding WAG at present, stocks worth considering in the broader medical sector are CVS Health Corporation (CVS), Abaxis, Inc. (ABAX) and Haemonetics Corporation (HAE). All the three stocks hold a Zacks Rank #2 (Buy).
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