Shares of Walgreens Boots Alliance (NASDAQ:WBA) are down over 9% this week after the pharmacy chain operator reported earnings earlier this week.
Investors Disappointed After Only Reaffirmed Guidance
WBA reiterated its full-year earnings per share (EPS) outlook due to a lower number of coronavirus vaccinations. The company maintained its full-year forecast despite topping the consensus estimates in the latest quarter, driven by strong sales in its Boots unit.
Q1 2022 hedge fund letters, conferences and more
Walgreens expects adjusted EPS for the full fiscal year to grow in low single-digits and has warned investors about mounting expenses due to investments in labor and its new consumer health unit.
"Given the uncertainty of the COVID environment, we are not surprised to see that management did not raise FY22 guidance despite the beat," said Elizabeth Anderson, an analyst at Evercore ISI.
Investors are now worried that Walgreens will miss the EPS target for its fiscal fourth quarter given that the company is tracking ahead of its guidance for the first three quarters.
The Deerfield, Illinois-based company has been administering coronavirus vaccines, which has helped it weather the sharp losses from softer prescription volumes and weakening over-the-counter (OTC) sales of its health and wellness offerings.
Walgreens reported sales of $32.60 billion to top the market estimate of $32 billion. The company has also reported adjusted earnings per share of 96 cents in the three-month period, topping the consensus estimates of 92 cents per share.
Still, investors were disappointed to see that the adjusted gross margin came in at 20.3%, below the consensus of 20.9%, suggesting that higher costs continue to squeeze profits.
The U.S. retail pharmacy chain operator introduced Walgreens Health last year - a new tech-powered platform that offers pharmacy and primary care in stores, at home, at a doctor’s office, or through a mobile app. Walgreens Health nabbed $596 million in sales in the third quarter.
"We will remain laser-focused in building out our Walgreens Health business, which is expected to be a significant percentage of our earnings growth," Brewer said.
Plans to Sell UK Boots Business Dropped
Instead, the company will explore alternative options for strategic divestments, according to its CEO Rosalind Brewer.
As for its Boots business, Walgreens has been holding talks with the consortium consisting of Indian business magnate Mukesh Ambani and the U.S. investment firm Apollo Global Management, who offered to purchase the UK unit for roughly £5 billion. This compares with Walgreen’s merger deal for Boots in 2014 which valued the business at around £9 billion ($10.81 billion) at the time.
But the company has now scrapped its plans to sell the business due to the ongoing volatility and uncertainty in financial markets, which is “severely impacting financial availability,” Walgreens said in a statement.
As a result, no proposed bid has properly reflected the true value of Boots and No7 Beauty Company, the company added.
Walgreens believes both businesses are well-positioned to continue seizing upcoming opportunities in the healthcare and beauty markets as they hold robust fundamental value. Therefore, the company will remain open to all potential opportunities to increase shareholder value, said Brewer.
Retail analyst and CEO of marketing agency Savvy, Catherine Shuttleworth, said Walgreens thinks Boots deserved more than what bidders were willing to pay for it. However, the analyst said the unit “needs an awful lot of work” and securing funds to acquire the business would have been very challenging in the current market environment. She also noted a notable pension liability within the business.
Shuttleworth explained that one of the main hurdles Boots faces is that consumers are able to purchase similar products from its rivals including online shops and supermarkets.
She added that Boots saw stronger sales performance during “lunchtime trade” when everyone was working in offices, but that has changed after the coronavirus outbreak as a lot of people still work from home.
Lawsuit Settled
Meanwhile, Walgreens has come to terms to pay $105 million to settle a class-action lawsuit that accused the company of deceiving its investors that surging drug prices and reimbursements would damage its pharmacy business.
Walgreens agreed to settle the lawsuit in a federal court in Chicago after six months of mediation even though it continued to deny any wrongdoing. According to the settlement papers, Walgreens ultimately agreed to pay for the settlement to avoid further uncertainty and costs.
According to its shareholders, the company boosted its stock price in 2014 by manipulating them through fake news about drug prices and reimbursement pressures, urging the investors to focus on the merger deal with Alliance Boots at the time.
As a result, the news spooked Walgreens’ investors and the company trimmed its forecast for fiscal 2014. The merger with Alliance Boots was completed at the end of that year and the class-action lawsuit against the company was filed a year later.
The $105 million settlement applies to the company’s shareholders in the period from April 17 to August 5, 2014, spearheaded by a Denmark-based pension fund “Industriens Pensionsforsikring A/S” as the lead plaintiff.
Summary
Walgreens shares are trading at the lowest level in over 18 months after the company kept its full-year profit forecast unchanged, implying business trends are tracking below expectations for its fiscal fourth quarter. Moreover, the company also dropped plans to sell its UK business Boots after initially entertaining a £5 billion bid from interested parties.
Did you enjoy this read? If so, consider subscribing to Five Minute Finance, The Tokenist’s weekly newsletter covering the most important macro trends to impact financial markets and emerging technology. Join today - it’s free.
Updated on
