Shares of Walgreens Boots Alliance (WBA) made modest gains early Thursday after the company reported stronger-than-expected earnings for the second quarter. Earlier this week, the stock had fallen to a 7-year low amid continuing uncertainty in the business world due to the raging coronavirus epidemic. The stock closed the last session down 6.3%.
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The company witnessed a double-digit growth in comparable sales in the first three months of March, but the trend reversed as people stopped venturing out in response to the social distancing guidelines. Being a healthcare services provider, Walgreens is in the front line of the COVID-19 crisis, which makes it important for the company to deliver its strategic initiatives in these times of difficulty. In addition to serving customers visiting the stores, it is also offering home delivery.
Q2 Earnings Beat
Though second-quarter adjusted profit dropped about 7% to 1.52 per share, it came in above the market’s prediction and the management’s guidance. Sales moved up 4% to about $36 billion, aided by the strength of the US retail business. Overall, the results benefited from the cost management program, which was partially offset by the bonus impact and unfavorable currency exchange rates.
Meanwhile, the ongoing store optimization program had a negative impact on Walgreen’s market share in the initial months of the fiscal year – dropped 50 basis points year-over-year to 21%. With the grocery trials with retail firm Kroger (KR) yielding positive results, the partnership can contribute to sales in future quarters. Another potential growth driver is the drug-store operator’s increasing digital capabilities, such as the Boots app and Boots Advantage Card, thanks to the investments in that area.
Cost Management
Addressing analysts at the post-earnings conference call, chief financial officer James Kehoe reiterated the management’s goal of achieving annual cost savings of more than $1.8 billion by 2022. The company expects the cost-cutting initiatives to generate sufficient funds for creating innovative business models and making investments. Citing the continuing uncertainty in the market, Kehoe did not confirm the full-year earnings per share guidance the management had issued earlier.
“We are putting in place what we internally call Black Swan funding for events we actually don’t think will happen. But we’re quite conservative in that point of view,” said Kehoe in response to an analyst’s query, adding that he has no intention to change the current dividend policy.
We’re very happy with our capital allocation policy and we’ve decided for the moment to continue with the share repurchase program, which you’ll recall, last year, we repurchased $3.8 billion.
James Kehoe, CFONear-term Challenges
In the near term, sales will be impacted by the falling store traffic and low consumer spending on discretionary items like beauty and food products. The recent closure of Walgreen’s opticians and hearing care businesses in the UK, where the company is witnessing weakness is sales, might add to the overall slump. Another issue is the demand-supply imbalance in certain categories, due to the evolving situation, which calls for an increase in purchases.
According to CEO Stefano Pessina, since the recent developments have increased the relevance of online shopping, Walgreens will continue with its digitizing efforts. The significance of the strategy will be much higher if the business environment changes substantially due to the present crisis.
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Walgreens’ shares traded slightly higher in early trading on Friday, after losing 31% since the beginning of the year. Rival pharmacy chain CVS Health (CVS), which lost considerable market value in recent months, traded slightly above $55 in the morning.