Walgreens Boots Alliance (WBA 59.99, -6.27, -9.46%) trades to
worse than three-year lows this afternoon despite beating third quarter
earnings expectations and raising the low end of its FY18 earnings guidance.
Apparently the stock -- along with a collection of its drugstore industry peers -- is
reacting negatively to news that everything-company Amazon (AMZN 1,690.65, +30.14, +1.82%) purchased pharmacy company PillPack, which could potentially
compete with WBA, potentially take market share away.
Jumping right into the third quarter print, Walgreens beat market expectations on earnings of $1.53/share. What’s more, revenues grew 14% compared to last year to $34.33 bln and narrowly beat market expectations.
Breaking down the revenue result, in the Retail Pharmacy USA segment, third quarter sales were up 15% to $25.9 bln on a 1.2% decline year/year in comparable store sales. Principally on account of increased prescription volume resulting from the acquisition of Rite Aid stores and from central specialty, pharmacy sales, which accounted for 72.5% of the division’s sales in the quarter, increased 19.3% compared with the year-ago quarter. Comparable pharmacy sales went unchanged year/year; brand inflation was offset by reimbursement pressure and impact from generics. The division filled 285.2 mln prescriptions (including immunizations) adjusted to 30-day equivalents in the quarter, an increase of 11.8% year/year. Prescriptions filled in comparable stores were about flat compared to the year ago quarter. This result allowed Walgreens' retail prescription market share on a 30-day adjusted basis in the third quarter to grow about 190 basis points over the year-ago quarter to 22.4%, as reported by IQVIA.
The Retail Pharmacy International business reported third quarter sales of $3.0 bln, an increase of 6.6% year/year, benefiting from favorable currency exchange rates. Meanwhile, on a constant currency basis, sales reportedly decreased 2.1%, comparable store sales decreased 1.4%, and comparable pharmacy sales decreased 1.7% year/year. Comparable retail sales also decreased 1.3% on a constant currency basis, mainly on account of Boots UK.
Lastly, the Pharmaceutical Wholesale segment reported third quarter sales up 12.6% to $6.0 bln, including the favorable impact of currency exchange rates. On a constant currency basis, comparable sales increased 4.0%, which was behind the company’s estimate of market growth, weighted on the basis of country wholesale sales, due to challenging market conditions in various continental European countries partially offset by strong performance in emerging markets and in the UK.
As to guidance, Walgreens raised the lower end of its guidance for FY18 by $0.05 per share and now anticipates adjusted diluted net earnings per share of $5.90-6.05.
Management also announced some shareholder return items which were approved by the Board of Directors: the BoDs authorized a $10 bln share repurchase program and declared a quarterly dividend of $0.44/share from the previous $0.40, an increase of 10%.
Now, you may be scratching your head as to why Walgreens' stock is dramatically lower after a performance like that. On the conference call, Walgreens management was asked about this morning's PillPack acquisition by Amazon. Walgreens CEO Stefano Pessina quashed concerns about the impact of the deal on Walgreens, stating, “We are not particularly worried.” Judging by the stock reaction, though, Mr. Pessina’s comments may not have held the clout or inspired the confidence he was going for. Though, he did make a good point – basically, he surmised that Walgreens knew PillPack was for sale, and though Mr. Pessina didn’t explicitly say that Walgreens had passed on PillPack, his comment that the company would do a deal if it saw the returns were worth it at a given price could be construed that Walgreens perhaps wasn’t willing to overpay for PillPack, but that Amazon was.
While this is all conjecture, one thing is clear: the Street’s knee-jerk reaction to Amazon’s PillPack news sends Walgreens stock lower on a session when, frankly, the stock should be higher. WBA was 2.6% lower in the five sessions leading into the print, and the stock still sits lower than the 200-day simple moving average (69.46). Obviously, investors have put more stock into the potential impact of Amazon’s PillPack deal rather than Walgreens’ results.
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