Acquisition of Rite Aid is 'progressing as planned,' WBA says

DEERFIELD, Ill. — Walgreens Boots Alliance (WBA) saw sales and adjusted net earnings rise in its fiscal 2016 third quarter, with adjusted earnings per share exceeding Wall Street’s consensus forecast.

WBA said Wednesday that its pending acquisition of Rite Aid Corp. remains on track for completion in the second half of this year, and it has reached its four-year objective of $1 billion in net synergies with the merger of Walgreen Co. and Alliance Boots, announced in June 2012 and completed at the end of 2014.

WBA also reported that the first phase of an initiative to enhance the beauty offering in Walgreens drug stores is under way, and the company expects to roll out the update to more than 1,800 stores by the end of calendar 2016.

For the third quarter ended May 31, WBA’s net sales totaled $29.5 billion, up 2.4% (3.3% on a constant currency basis) from $28.8 billion a year earlier.

On a GAAP basis, net income attributable to WBA for the third quarter came in at $1.1 billion, or $1.01 per diluted share, down from $1.3 billion, or $1.18 per diluted share, a year ago. WBA said the decline stems from fluctuations in the quarterly fair value adjustments of its AmerisourceBergen Corp. warrants, which are part of WBA’s long-term strategic agreement with the pharmaceutical distributor.

Adjusted net earnings attributable to WBA were $1.29 billion, or $1.18 per diluted share, for the quarter, compared with $1.12 billion, or $1.02 per diluted share, in the prior-year period.

Analysts, on average, had projected WBA’s adjusted EPS at $1.14, with estimates ranging from a low of $1.09 to a high of $1.18, according to Thomson Financial.

Stefano Pessina

“We delivered solid results in the quarter while continuing to make progress in several key areas, including our work to develop long-term strategic relationships and pursue partnership opportunities,” WBA executive vice chairman and chief executive officer Stefano Pessina said in a statement.

“I’m pleased to report that, since the quarter end, we achieved our goal set four years ago of at least $1 billion in combined net synergies in fiscal year 2016 related to the strategic combination with Alliance Boots,” Pessina added. “This provides us with a strong platform to further enhance operating performance, to meet the challenges of the current volatility in many of our markets and to better position our company for long-term success.”

WBA reported that it reached its net synergies goal in June. Combined net synergies were $330 million in the fiscal 2016 third quarter. The $1 billion in net synergies excludes synergies from the AmerisourceBergen relationship, benefits of refinancing the legacy Alliance Boots debt at a lower cost and the proposed Rite Aid acquisition, the company noted.

The Rite Aid acquisition is “progressing as planned,” WBA said Wednesday. “Walgreens Boots Alliance is continuing its integration planning and continues to expect the Rite Aid transaction to close in the second half of calendar 2016,” the company stated.

WBA said that on June 1 it completed a public offering of $6 billion in unsecured, unsubordinated notes, the net proceeds of which it plans to use to fund part of the cash consideration in the purchase of Rite Aid, to retire a portion of Rite Aid’s debt and to pay related fees and expenses.

On the retail side, WBA’s Retail Pharmacy USA division — comprising Walgreens and Duane Reade — posted sales of $21.2 billion in the fiscal 2016 third quarter, up 3.7% from $20.43 billion a year earlier.

Same-store sales in the quarter climbed 3.9% year over year, reflecting gains of 0.1% in the front end and 6% in the pharmacy. WBA attributed the uptick in front-end comparable-store sales mainly to higher sales in the health and wellness and the photo categories, partially offset by decreases in some convenience categories.

Pharmacy sales, representing 67.4% of the division’s total sales in the quarter, rose 5.8% versus a year ago. Prescription count (including immunizations) was up 3.9% to 235 million, adjusted to 30-day equivalents. On a comp-store basis, prescriptions filled rose 4.5%, due primarily to continued growth in Medicare Part D volume, WBA said. The company added that retail prescription market share on a 30-day adjusted basis grew about 30 basis points in the quarter to 19.6%, based on data from IMS Health.

WBA’s Retail Pharmacy International division saw sales dip 2.3% to $3.2 billion in the third quarter. On a constant currency basis, however, revenue was up 3.4% year over year. Same-store sales gained 0.2%.

Meanwhile, sales in WBA’s Pharmaceutical Wholesale business totaled $5.7 billion in the third quarter, up 0.7% year over year.

Looking ahead, WBA raised the lower end of its guidance for the 2016 fiscal year by 10 cents per share and now projects adjusted EPS (diluted) of $4.45 to $4.55. The company said its estimate assumes no impact from the proposed Rite Aid acquisition.

The consensus analyst forecast is for WBA to report fiscal 2016 adjusted EPS of $4.49, with estimates running from a low of $4.43 to a high of $4.55, according to Thomson Financial.