Walgreens Operating Margins Fall For Q3 2019, Full Year Guidance Maintained

Walgreens (NYSE:WBA) announced its Q3 2019 (ended May 2019) results on June 27, 2019, followed by a conference call with analysts. The company just beat consensus for revenue which was recorded at $34.5 billion, up by 0.7% y-o-y. The Net earnings missed consensus and was recorded at $1.13, down from the $1.35 per share in the same period of 2018. The fall was mainly due to the impact of costs related to the Transformational Cost Management Program and a lower contribution from the company’s equity earnings in AmerisourceBergen due to the impairment of PharMEDium’s long-lived assets in the quarter.

Walgreens reported $127 billion in Total Revenues in FY 2018. This included 4 revenue streams:

• Retail Pharmacy USA- Pharmacy Drugs: $65.3 billion in FY 2018 (51.4% of Total Revenues). This includes the sale of prescription drugs in the US.
• Retail Pharmacy USA- OTC & Other: $27.3 billion in FY 2018 (21.5% of Total Revenues). This includes the sale of healthcare and retail products in the US.
• Retail Pharmacy International: $11.8 billion in FY 2018 (9.3% of Total Revenues). This includes the sale of prescription drugs and provision of pharmacy-related services internationally.
• Pharmaceutical Wholesale: $22.7 billion in FY 2018 (17.8% of Total Revenues). This includes distribution of prescription medicines to pharmacists.

We have summarized our key expectations from the earnings announcement in our interactive dashboard – What Has Driven Walgreens Boots Alliance’s Revenues & Expenses Over Recent Quarters, And What Can We Expect For Full-Year 2019? In addition, here is more Consumer Staples data.

Key Factors Affecting Earnings:

Revenue Growth to continue:

• Walgreens has seen a continuous rise in revenue for the past 4 quarters over the same period in the previous year. For Q3 2019 (ended May 2019) the company recorded revenue for the quarter at $34.6 billion up by 0.7% y-o-y.
• Retail Pharmacy USA- Pharmacy Drugs segment has been the highest contributor to Total revenues and has seen constant growth over the years. The revenue increased from $56.8 billion in 2016 to $65.3 billion in 2018. We expect overall growth to continue at this good pace in 2019.
• Retail Pharmacy USA- OTC & Other segment has remained nearly flat over the years. The revenue just increased from $27.26 billion in 2016 to $27.29 billion in 2018. We expect a slight growth in the segment for 2019.
• Retail Pharmacy International segment has seen negative growth in the last few years as the average revenue per store dropped. The revenue decreased from $12.8 billion in 2016 to $11.8 billion in 2018. We expect a slight growth in the segment for 2019 as the average revenue per store metric starts to stabilize.

Trend in Expenses:

• Cost of Sales is steady in the range of 75-77% of Total Revenue. In Q3 2019 (ended May 2019) the metric went up a bit to 78.5% of Total Revenue.
• Selling, General and Administrative expenses contributes the second highest to Total expenses (18-21%) after Cost of Sales. In Q3 2019 (ended May 2019) it remained in range at 18.5%
  

Full Year Outlook:

• For the full year, we expect gross revenue to increase by 6.3% to $135 billion, led by the growth in Retail Pharmacy USA- Pharmacy Drugs.
• EBITDA margin is expected to increase slightly to 9.4%.

Trefis has a price estimate of $69 per share for Walgreens’ stock. The value is based on the expectation that the company will continue its steady revenue growth while improving margins.

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