Why Walgreens Earnings Beat May Not Have Been Enough

Walgreens Boots Alliance Inc. (NASDAQ: WBA) reported third-quarter fiscal 2018 results before markets opened Thursday. The new member of the Dow Jones industrials index reported adjusted diluted earnings per share (EPS) of $1.53 on net sales of $34.33 billion. In the same period a year ago, Walgreens reported EPS of $1.33 on revenue of $30.12 billion. Third-quarter results compare to the consensus estimates for EPS of $1.48 and $34.05 billion in sales.

The drug store giant also announced a 10% increase in its dividend from $0.40 a quarter to $0.44 and a new $10 billion share buyback program. At last night’s closing price, the increased dividend would pay a yield of about 2.5%.

Walgreens raised the low end of its full-year EPS guidance by five cents and now expects adjusted EPS of $5.90 to $6.05 for the 2018 fiscal year. The company’s completed acquisition of 1,932 Rite Aid stores is not expected to have a significant impact on full-year adjusted EPS.

CEO Stefano Pessina said:

I am pleased that, in what has been a challenging environment, we have again delivered solid earnings per share growth combined with healthy cash flow. We expect to continue to drive growth, bringing more patients to our U.S. pharmacies through the recent acquisition of Rite Aid stores and through strategic partnerships. The $10 billion share repurchase program announced this morning demonstrates our confidence in future business performance and, as ever, our focus on driving long-term stockholder value.

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So far, so good. But there were a few glitches. Retail pharmacy same-store sales decreased by 1.2% even though sales rose by 19% thanks to the Rite Aid acquisition. Comparable pharmacy sales were flat compared the same quarter last year, which the company blamed on brand inflation offset by reimbursement pressure and the impact of generics.

In its international division, Walgreens posted sales of $3 billion, up 6.6% year over year. Same-store sales slipped 1.4%, pharmacy sales fell 1.7%, and retail (front-of-store) sales decreased 1.3% on a constant currency basis.

Looking ahead, analysts are expecting fourth-quarter EPS of $1.47 and sales of $33.98 billion. For the full fiscal year, the consensus sales estimate is $131.86 billion, and EPS is tabbed at $5.95.

Shares traded down about 0.5% in Thursday’s premarket, at $65.90 in a 52-week range of $61.56 to $83.89. The 12-month price target on the stock is $80.83.

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