Quarterly financial report is first since completion of merger

DEERFIELD, Ill. — In the first financial report since its formation at the close of 2014, Walgreens Boots Alliance Inc. recorded earnings per share for the fiscal 2015 second quarter that exceeded analysts’ forecasts.

Management also announced on Thursday that it is expanding its restructuring program after identifying additional opportunities to cut costs, particularly in the Retail Pharmacy USA division, a move that will involve closing approximately 200 U.S. stores. The company also said in a conference call Thursday that during the restructuring period it also expects to open about the same number of stores.

Walgreens also intends to reorganize corporate and field operations, drive operating efficiencies and streamline information technology and other functions, with the goal of creating a “faster and more agile company.” Executives estimate that the restructuring program will result in pretax charges totaling between $1.6 billion and $1.8 billion, approximately 60% of which will be cash charges.

Walgreens-Boots had announced a three-year, $1 billion cost-reduction initiative last August and said it would provide further information about the program in subsequent quarters. After what it called “a rigorous analysis,” the company said it identified additional opportunities for savings, which stands to raise the total expected cost savings to $1.5 billion by the end of fiscal 2017.

“This quarter marked a solid start for our new company, and I remain as optimistic as ever about our long-term future,” Stefano Pessina, executive vice chairman and acting chief executive officer of Walgreens Boots Alliance, said in a statement. “At the same time, we understand the work that is needed to proactively address headwinds such as reimbursement pressure and competition.”

Pessina went on to identify the major areas of focus. First, he said, will be improving the operating performances of all the company’s divisions. Secondly, the company will refresh and reinvest in its United States stores to improve the customer experience and boost margins. “Third, we are restructuring our cost base, with a focus primarily in the U.S., to create a more efficient cost model and become a more agile company,” he said. “Through these efforts, Walgreens Boots Alliance is determined to lead the way in our industry and be at the forefront of innovative, pharmacy-led health care.”

Stefano Pessina

Walgreens Boots Alliance has organized its operations and is reporting results in three segments: Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale. The second-quarter and first half financials include fully consolidated results from Alliance Boots GmbH for January and February while Alliance Boots results for December are treated as equity income from Walgreen’s pre-merger 45% stake.

Second-quarter net earnings attributable to Walgreens soared 185.2% to $2.04 billion, or $1.93 per diluted share. Excluding several special items including acquisition-related amortization, asset impairment, LIFO, and acquisition-related costs, among others, adjusted earnings rose 33.2% to $1.2 4 billion, or $1.18 per share, well above the consensus estimate of 95 cents per share among analysts surveyed by FactSet.

Net sales for the quarter expanded 35.5% to $26.57 billion, reflecting the inclusion of results from Alliance Boots. Analysts were expecting the top line to reach $27.83 billion.

First-half net earnings leapt 101% to $2.89 billion, while adjusted net profit increased 22.9% to $1.99 billion. Year-to-date sales grew 21.6% to $46.13 billion. Combined net synergies for the first half totaled $310 million, and are on track to reach at least $650 million for the year. Management expects combined net synergies to reach or exceed $1 billion in fiscal 2016.

Second-quarter operating income for the Retail Pharmacy USA division, which consists of the Walgreens and Duane Reade banners, rose 6.2% to $1.3 billion on a 7.4% increase in sales to $21.0 billion. Comparable-store sales grew 6.9%.

Pharmacy sales, which generated 64.4% of the division’s top line, gained 10.1% overall, while same-store pharmacy sales improved 9.7%. Overall script count increased 4.8% to 224 million, including immunizations.

On a comparable-store basis, script count rose 5%, driven by the positive impact of a strong cough, cold and flu season, continued growth in Medicare Part D prescriptions and market growth. Walgreens estimates that the division’s share of the retail prescription market in the United States increased 20 basis points on a 30-day adjusted basis to 19.3%.

Front-end comp-store sales increased 2.5% for the second quarter, and executives reported that gross margins improved year over year.

During the first half, the Retail Pharmacy USA division opened 71 stores, including 25 relocations, while closing 46 stores. At the end of the half, the division operated 8,232 drug stores in 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands.

In addition to financial results for the second quarter and first half, management revealed its full-year earnings guidance. Executives expect adjusted net earnings attributable to Walgreens Boots Alliance to range between $3.45 and $3.65 per diluted share. Analysts on average are expecting earnings of $3.61 per diluted share.

Walgreens Boots Alliance added that its board is continuing in its search for a permanent CEO. The company said the board’s search committee is working with a top executive recruiting firm.

“While we work through this process in a deliberate and methodical manner to fill such a critical role, we are making the necessary business decisions to move us forward and will continue to do so while we find the right candidate,” stated executive chairman Jim Skinner.