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Walgreens Fails to Excite Investors Despite Upbeat Q3 Results

Story Highlights

Walgreens stock lost its sheen in the pre-market trading session on Thursday after the market reacted to its third-quarter results. 

Walgreens Boots Alliance, Inc. (NASDAQ: WBA) has delivered impressive results for the third quarter of Fiscal 2022 (ended May 31, 2022). The company’s earnings and sales surprise stood at 4.4% and 1.7%, respectively.

Unfortunately, shares of this $35.3-billion retail pharmacy company slipped 1.2% in the pre-market trading session on Thursday. This could be because of weak comparisons from the year-ago tallies.

Quarterly Highlights

In the quarter, Walgreens’ adjusted earnings were $0.96 per share, above the consensus estimate of $0.92 per share. On a year-over-year basis, the bottom line was down 30.4% from $1.38 per share recorded in the year-ago quarter.

Revenues totaled $32.6 billion, higher than the consensus estimate of $32.06 billion. However, the top line witnessed a year-over-year decline of 4.2%. Lower volumes of Covid-19 vaccines played spoilsport in the quarter.

The sales in the United States segment decreased 7.1% to $26.7 billion, due to the poor performance of AllianceRx Walgreens. However, sales in the International segment inched up 0.3% to $5.3 billion, driven by growth in Boots UK and German wholesale businesses. Sales from the Walgreens Health segment stood at $596 million in the quarter.

It is worth noting that the company has dropped plans to sell its Boots and No7 Beauty Company businesses.

The margin profile was weak in the quarter. The adjusted gross margin decreased 90 basis points (bps) to 20.3%, and the adjusted operating margin was down 150 bps to 2.4%.

The company’s cash flow from operating activities declined 7.1% year-over-year. Capital expenditures grew 20.1% in the quarter and free cash flow was down 12.9%.

Also, Walgreens’ cash and cash equivalents were $2.29 billion at the end of the third quarter, higher than $0.56 billion at the end of Fiscal 2021 (ended August 31, 2021). Long-term debt was $10.7 billion versus $7.7 billion at Fiscal 2021 end.

Projections & Capital Deployment

For Fiscal 2022 (ending August 2022), the company expects adjusted earnings per share to increase in the low-single digits.

In the first three quarters of Fiscal 2022, Walgreens used $7.4 billion to repay debts, $187 million for share buybacks, and $1.25 billion for dividend payments. The company’s annual dividend yield is 4.7%.

Stock Rating

On TipRanks, the company has a Hold consensus rating based on one Buy, eight Holds, and one Sell. WBA’s price forecast of $47.70 suggests 16.71% upside potential from current levels. Over the past year, shares of WBA have grown 22.3%.

Risk Analysis

According to TipRanks, Walgreens’ main risk category is Finance & Corporate, which contributes 13 risks to the total 42 risks identified for the stock.

Conclusion

As evident from the company’s third-quarter results, lower demand for COVID-19 vaccines may continue to adversely impact Walgreens’ top-line numbers. Also, high costs and expenses and a weak margin profile are concerning.

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