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Shares of pharmacy, health and well-being company Walgreens Boots Alliance (NASDAQ: WBA) popped 2% on Friday before settling for a narrow loss after the company posted fiscal first-quarter earnings. The results beat analyst expectations on profit, although revenue came up slightly shy of forecasts.
In addition, investor reaction was mixed as the company narrowed its full-year forecast. It now expects a higher floor for fiscal 2016 earnings per share.
A Massive Industry Leader
Walgreens Boots Alliance is a very large company after the massive combination of Walgreens and Boots Alliance. The two companies first became entangled in 2012, when they launched a long-term strategic partnership. At that time, Walgreens initially acquired 45% ownership in Boots Alliance for approximately $6.7 billion.
The agreement also included an option for Walgreens to pursue a complete takeover of the remaining 55% of the company. Walgreens took that option, buying out the rest of Boots Alliance for an additional $15.3 billion in 2014.
As a result, Walgreen Boots Alliance is now an industry powerhouse with a global reach. Buying Boots Alliance significantly expanded Walgreens’ international reach. The deal brought together Walgreens (the largest pharmacy operator in the United States) as well as Boots (a major pharmacy operator in Europe) and Alliance Healthcare (a large international wholesaler and distributor).
The current company operates more than 12,000 stores.
Mixed Walgreens Earnings Lead to Confusion
Last quarter, Walgreens Boots Alliance reported $29 billion in sales, up 48%. That is a very strong number, but again is due mostly to the acquisition. The result actually fell short of analyst forecasts, which called for $29.25 billion, according to averages compiled by FactSet.
Adjusted earnings clocked in at $1.03, which beat expectations of $0.96 per share. It seems from the results that Walgreens has been very successful in creating cost synergies, although the top line result was a disappointment.
As such, investors aren’t quite sure how to react. Shares of Walgreens are up 4% in the past year, a modest gain but still better than the slight decline posted by the S&P 500 index in the same period.
Meanwhile, the company raised the bottom end of its full-year forecast. Management now expects $4.30-$4.55 per share in fiscal 2016 adjusted earnings. The midpoint of management’s guidance is $4.42 per share; analysts expect $4.44 per share.
Analysts expect Walgreens to produce further cost cuts going forward, and the company intends to follow through in that regard. The company realized $288 million in deal-related cost synergies last quarter, and management expects at least $1 billion in annual cost savings for the full fiscal year. Further cost cuts may be available if the company’s proposed takeover of Rite Aid (NYSE: RAD).
Another Major Buyout in the Cards?
For investors, the biggest catalyst going forward is Walgreens’ takeover bid for Rite Aid, a major pharmacy competitor in the United States.
In October 2015, Walgreens announced it had reached agreement to buy Rite Aid for a total enterprise value of $17.2 billion. Rite Aid has scheduled a stockholder’s meeting next month to discuss the deal.
The reason why Walgreens wants to swallow Rite Aid is simple: the retail pharmacy business in the United States is doing very well – and it’s growing. Last quarter, Walgreens generated 4% sales growth in its U.S. retail pharmacy business, year-over-year. In fact, that was the company’s best-performing segment for the quarter.
With an aging population, demand for pharmaceutical products is rising rapidly in the U.S. Pharmacy sales represent 68% of the U.S. retail business, and comparable sales of those products rose at a very healthy 9.3%.
As a result, it is not surprising to see Walgreens pursuing its smaller competitor. Investors should focus on future quarterly earnings results going forward, to make sure the integration remains on track to continue to monitor the proposed takeover of Rite Aid.
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