Walgreens Boots Alliance reports Q3 results

Lower demand for COVID-related services, a value-driven and cautious consumer and a weaker respiratory season created margin pressures for Walgreens Boots Alliance in the third quarter, which ended May 31, 2023.

In releasing Q3 results today, CEO Rosalind Brewer said, "WBA achieved 8.9% constant currency sales growth in the third quarter despite a challenging operating environment. Consumers continue to appreciate the value, convenience and range of services provided by Walgreens and Boots. However, significantly lower demand for COVID-related services, a more cautious and value-driven consumer and a recently weaker respiratory season created margin pressures in the quarter.”

Brewer continued, “Our revised guidance takes an appropriately cautious forward view in light of consumer spending uncertainty, while still demonstrating clear drivers of a return to operating growth next fiscal year. We are raising our cost savings program target to $4.1 billion and taking immediate actions to optimize profitability for our U.S. healthcare segment. I am confident that our turnaround strategy positions WBA to drive sustainable core growth and deliver long-term shareholder value."

WBA third quarter sales increased 8.6% from the year-ago quarter to $35.4 billion, an increase of 8.9% on a constant currency basis, reflecting sales growth in the U.S. retail pharmacy and international segments, and a significant contribution from the U.S. healthcare segment.

Operating loss was $.5 billion in the quarter compared to a loss of $.3 billion in the year-ago quarter. Operating loss in the quarter reflects a $431 million non-cash impairment of pharmacy license intangible assets in Boots UK. Adjusted operating income was $1 billion, an increase of .6% on a constant currency basis, reflecting improvements in U.S. core pharmacy and international growth, partly offset by lower volumes of COVID-19 vaccinations and testing, planned payroll investments in U.S. retail pharmacy and investments in U.S. health care, the company said.

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Net earnings in the third quarter was $118 million compared to net earnings of $289 million in the year-ago quarter, primarily driven by lower operating income. Adjusted net earnings were $860 million, up 3.4% on a constant currency basis, primarily driven by adjusted operating income.

Earnings per share in the third quarter was 14 cents, compared to EPS of 33 cents in the year-ago quarter. Adjusted EPS increased 3.3% to $1.00, an increase of 3.6% on a constant currency basis, despite a COVID-19 headwind of 19.5%.

Net cash used for operating activities was $20 million in the third quarter. Free cash flow was negative $444 million, a $1.7 billion decrease compared with the year-ago quarter, driven by phasing of working capital and increased capital expenditures including growth initiatives and U.S. health care.

Sales in the first nine months of fiscal 2023 were $103.7 billion, an increase of 3.4% from the year-ago period, and an increase of 4.8% on a constant currency basis.

Operating loss in the first nine months of fiscal 2023 was $6.4 billion compared to operating income of $2.2 billion in the year-ago period. Operating loss in the period reflects a $6.8 billion pre-tax charge for opioid-related claims and litigation. Adjusted operating income was $3.2 billion, a decrease of 26.6% on a constant currency basis, reflecting a COVID-19 headwind of approximately 22%, planned payroll investments in U.S. retail pharmacy and growth investments in U.S. health care, partly offset by improved retail contributions in the United States, and international growth.

For the first nine months of fiscal 2023, net loss was $2.9 billion compared to net earnings of $4.8 billion in the year-ago period. This decrease is driven by a $5.5 billion after-tax charge for opioid-related claims and litigation and lapping of a $2.5 billion after-tax gain on the company's investments in VillageMD and Shields Health Solutions in the year-ago period, partly offset by a $1.5 billion after-tax gain from the partial sale of the company's investments in AmerisourceBergen and Option Care Health. Adjusted net earnings were $2.9 billion, a decrease of 20.9% on a constant currency basis, primarily driven by lower adjusted operating income.

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Loss per share for the first nine months of fiscal 2023 was $3.36 compared to EPS of $5.49 from the year-ago period. Adjusted EPS decreased 21.7% to $3.32, reflecting a decrease of 20.7% on a constant currency basis, mainly due to a lower COVID-19 contribution of approximately 20%.

Net cash provided by operating activities was $1.2 billion in the first nine months of fiscal 2023, a decrease of $2.6 billion from the year-ago period, and free cash flow was $116 million, a decrease of $2.5 billion from the year-ago period driven by lower earnings, lower working capital contributions and increased capital expenditures including growth initiatives.

The U.S. retail pharmacy segment had third quarter sales of $27.9 billion, an increase of 4.4% from the year-ago quarter. Comparable sales increased 7% from the year-ago quarter.

Pharmacy sales increased 6.3% compared to the year-ago quarter, and comparable pharmacy sales increased 9.8%, benefiting from branded drug inflation. Comparable prescriptions filled in the quarter increased 1.6%, while comparable prescriptions excluding immunizations increased 2.8%. Total prescriptions filled in the quarter, including immunizations, adjusted to 30-day equivalents, increased .1% to 305 million. 800,000 COVID-19 vaccinations were administered in the quarter compared to 4.7 million in the year-ago quarter.

[Read more: Walgreens Boots Alliance reports Q4, fiscal 2022 results]

Retail sales decreased 1% and comparable retail sales decreased .2% in the third quarter. Excluding tobacco, comparable retail sales increased .2%, led by strong results in the grocery and household and beauty categories, partly offset by a 90 basis point headwind from holiday seasonal weakness with discretionary spending pullback, and an 80 basis point headwind from lower sales of OTC test kits.

Gross profit decreased 3.1% compared with the year-ago quarter, and adjusted gross profit decreased 3.2%. Gross profit and adjusted gross profit were largely driven by a 5% headwind from a lower contribution from COVID-19 vaccination and testing.

Operating income in the third quarter was $.4 billion compared to operating loss of $90 million from the year-ago quarter due to lower selling, general and administrative expenses. Adjusted operating income decreased $4 million to $1 billion from the year-ago quarter, reflecting a 22% headwind from lower COVID-19 vaccination and testing volumes, continued reimbursement pressure and increased labor investments.

The international segment had third quarter sales of $5.6 billion, an increase of 5% from the year-ago quarter, held back by an adverse currency impact of 1.9 percentage points. Sales increased 6.9% on a constant currency basis, with Boots UK sales growing 10.2%, and the Germany wholesale business growing 3.8%.

Boots UK comparable pharmacy sales increased 5.7% compared with the year-ago quarter. Boots UK comparable retail sales increased 13.4% compared to the year-ago quarter, growing market share for the ninth consecutive quarter. Footfall continued to improve, increasing 7% compared to the year-ago quarter. Boots.com continued to perform strongly, with sales up over 25% compared to the year-ago quarter, accounting for over 14 percent of retail sales.

Gross profit increased 7.1% compared with the year-ago quarter, including an adverse currency impact of 3.1 percentage points. Adjusted gross profit increased 10.3% on a constant currency basis, with solid growth across all International markets, led by strong retail sales in the UK.

Operating income decreased from $100 million in the year-ago quarter to a loss of $302 million. Adjusted operating income increased 19.8% to $208 million, an increase of 20.9% on a constant currency basis.

The U.S. health care segment had third quarter sales of $2.0 billion, an increase of $1.4 billion compared to the year-ago quarter. On a pro forma basis, the segment's businesses grew sales at a combined rate of 22% in the quarter. VillageMD, including Summit Health, grew pro forma sales 22%, reflecting existing clinic growth and clinic footprint expansion. Shields grew pro forma sales 35%, driven by recent contract wins, further expansion of existing partnerships, and strong executional focus. CareCentrix grew pro forma sales 15% as a result of additional service offerings with existing partners.

Gross profit was $89 million as Shields and CareCentrix gross profit was partly offset by VillageMD's expansion. VillageMD added 93 clinics compared to the year-ago quarter. Adjusted gross profit was $114 million, an increase of $135 million compared to the year-ago period as the segment continues to rapidly scale.

Operating loss was $522 million. Adjusted operating loss was $172 million, which excludes certain costs related to stock compensation, amortization of acquired intangible assets and acquisition related costs. Adjusted EBITDA loss was $113 million, reflecting VillageMD expansion and lower CityMD visit volume due to a weaker respiratory season, partly offset by positive contributions from Shields, the company said.

For the full fiscal year 2023, Walgreens Boots Alliance now expects adjusted EPS of $4.00 to $4.05 from $4.45 to $4.65 previously, reflecting challenging consumer and macroeconomic conditions, and lower COVID-19 vaccine and testing volumes.

The fourth quarter is expected to be negatively impacted by a higher effective tax rate, shifting U.S. consumer spending with heightened macro pressures, and the impact of a weaker respiratory season for both U.S. Retail Pharmacy and U.S. Healthcare. Despite these challenges, the company said it expects adjusted operating income growth to accelerate in the fourth quarter from .6% in the third quarter, the company said.

For the fiscal year 2024, Walgreens Boots Alliance is providing preliminary expectations for low- to mid-single digit adjusted operating income growth, with the U.S. Healthcare and U.S. Retail Pharmacy performance more than offsetting headwinds from lower sale and leaseback program benefits, lower COVID-19 contribution and the sale of holdings in AmerisourceBergen. Adjusted operating income growth is expected to outpace adjusted EPS due to a higher tax rate and a negative impact from non-controlling interest.