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Pessina named CEO of Walgreens Boots Alliance

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Company's adjusted EPS tops Wall Street's forecast for third quarter

DEERFIELD, Ill. — Walgreens Boots Alliance Inc. announced executive vice chairman Stefano Pessina as its permanent chief executive officer in reporting increased sales and earnings for its fiscal 2015 third quarter.

Stefano Pessina_WBA_headshot

Stefano Pessina

The company said Thursday that its board of directors appointed Pessina as CEO, effective immediately. He had been serving as acting CEO since January, following the closure of the Walgreen Co.-Alliance Boots GmbH merger and the retirement of Greg Wasson. As CEO, Pessina will continue reporting to executive chairman James Skinner.

“In Walgreens Boots Alliance’s initial six months as a newly combined company, Stefano has done an extraordinary job leading the new enterprise, focusing our strategy while enhancing our financial performance,” Skinner said in a statement. “The integration of Walgreens and Alliance Boots is proceeding exceptionally well, with Stefano’s vision for the company driving the organization forward. Through his leadership, our organization is meeting the challenges of combining our two companies, and many of the opportunities we anticipated from our strategic combination are now becoming a reality. In order to continue this momentum and to recognize the progress that is already being made, the board concluded Stefano is the very best person to achieve our vision to be a truly global health care champion, the first choice for pharmacy, health care and well-being across the world.”

For its third quarter ended May 31, Walgreens Boots Alliance posted adjusted net earnings per share (EPS) above Wall Street’s forecast. Adjusted net earnings attributable to Walgreens Boots Alliance totaled $1.12 billion, or $1.02 per diluted share, compared with $803 million, or 83 cents per diluted share, a year earlier. Analysts, on average, had projected adjusted EPS of 87 cents, with estimates ranging from a low of 82 cents to a high of $1.01, according to Thomson Financial.

Walgreens Boots Alliance said this year’s third-quarter earnings adjustments were a net reduction of GAAP net earnings of $179 million or 16 cents per diluted share. In the quarter, GAAP net earnings attributable to Walgreens Boots Alliance were $1.3 billion, or $1.18 per diluted share, compared with $714 million, or 74 cents per diluted share, in the prior-year period.

Third-quarter sales came in at about $28.8 billion, up 48.4% from $19.4 billion a year earlier, mainly due to the inclusion of Alliance Boots for the entire fiscal 2015 quarter, the company said.

“In just six months since the strategic combination that formed Walgreens Boots Alliance, we are beginning to make progress in our operations, as we were able to deliver another strong quarter,” Pessina stated. “Our Retail Pharmacy USA division produced a solid increase in comparable prescriptions filled in the quarter, along with improved retail front-end margins and very good cost control. Our other divisions continued to perform as we expected. Of course, there is more work to be done as we move forward. The fourth quarter is typically the slowest quarter because of seasonality in the business, while prescription reimbursement pressure continues to impact our pharmacies, making retail margin expansion and cost control as important as ever.”

The company also increased and narrowed its guidance for fiscal 2015. It now projects adjusted net earnings attributable to Walgreens Boots Alliance at $3.70 to $3.80 per share on a diluted basis. The consensus analyst estimate is for adjusted EPS of $3.64, with estimates running from a low of $3.57 to a high of $3.75, according to Thomson Financial. Also on Thursday, Walgreens Boots Alliance reaffirmed its goal of adjusted net EPS (diluted) of $4.25 to $4.60 for fiscal 2016.

Walgreens Boots Alliance has organized its operations and reports results in three segments: Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale.

walgreens W logo_floor_WEBThe Retail Pharmacy USA division, whose retail pharmacy brands are Walgreens and Duane Reade, had fiscal 2015 third-quarter sales of $20.4 billion, up 5.3% over the year-ago period. Same-store sales rose 6.3% year over year. In the front end, same-store sales edged up 1.6% in the quarter, with growth in basket size partially offset by lower customer traffic, according to the company

Pharmacy sales, which accounted for 66.1% of division sales in the quarter, climbed 7% in the quarter versus a year ago, with comparable pharmacy sales rising 9.1%. Prescription count, including immunizations, totaled 226 million on a 30-day adjusted basis, up 3.8%. Prescriptions filled in comparable stores increased 4.1%. Walgreens Boots Alliance said the Retail USA division’s retail prescription market share on a 30-day adjusted basis gained 20 basis points over a year ago to 19.3%, as reported by IMS Health.

GAAP operating income for the division in the third quarter increased 0.9% year over year. Adjusted operating income grew 8.8% to $1.3 billion. The company said both increases stem from higher sales and lower selling, general and administrative expenses, partially offset by having no equity earnings in Alliance Boots in the current period versus three months in the comparable period and lower gross margins.

The Retail USA division opened or acquired 104 drug stores in the first nine months of fiscal 2015, including 34 relocations, and closed 37 locations. As of May 31, the division operated 8,240 drug stores in all 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands.

Meanwhile, the Retail Pharmacy International division had third-quarter sales of $3.3 billion, with same-store sales up 3.2% year over year on a pro forma, constant currency basis. The division’s retail brands include Boots in the United Kingdom, Thailand, Norway, the Republic of Ireland and the Netherlands; Benavides in Mexico; and Ahumada in Chile. As of May 31, the unit operated 4,565 pharmacy, health and beauty retail stores in eight countries, a net gain of six stores since the end of the fiscal 2015 second quarter.

The Pharmaceutical Wholesale division, which mainly operates under the Alliance Healthcare brand, had third quarter sales of $5.7 billion. On a pro forma constant currency basis, sales increased 0.2 percent compared with the same period a year ago. GAAP operating income was $162 million, while adjusted operating income was $171 million.

Walgreens Boots Alliance also announced Thursday that that it has acquired Liz Earle Beauty Co. Ltd., owner of the Liz Earle skin care brand, from Avon Products Inc. for £140 million ($215 million). Liz Earle is a premium skin care range that uses naturally active ingredients and is recognized as one of the leading botanical brands in the United Kingdom, Walgreens Boots Alliance said.

In addition, Walgreens Boots Alliance said it’s making steady progress with its program to save $1.5 billion costs through the end of fiscal 2017. During the fiscal 2015 third quarter, the company said it reorganed Retail Pharmacy USA field operations and continued to optimize its corporate office; closed nine of a planned 200 U.S. stores, with 70 to 80 more closings slated by the end of the fiscal year; reduced Retail Pharmacy USA’s IT cost structure to enable significant core system investments over the next several years; and announced a reduction of about 700 nonstore based roles in Retail Pharmacy International. These actions resulted in pretax charges to GAAP financial results in the quarter of $160 million.

The company also announced a 6.7% increase in its quarterly dividend, to 36 cents per share. The dividend is payable on Sept. 11 to stockholders of record as of Aug. 19, and the increase raises the annual rate from $1.35 per share to $1.44 per share.

Also on Thursday, Walgreens Boots Alliance said its Walgreen Co. subsidiary plans to redeem $1 billion of its 1.8% notes due 2017 (issued 2012), and $750 million of its 5.25% notes due 2019 (issued 2009) on Aug. 10. The company said the redemption, to be made from its current $4.4 billion in cash resources, will enable it to more efficiently manage its balance sheet and potentially take advantage of lower financing costs down the road.

“The appointment of Stefano Pessina as CEO should also enhance investor confidence as it adds a layer of stability and affirms his commitment to the business,” William Blair & Co. analyst Mark Miller said in a research note Thursday.

Walgreens’ fiscal 2015 third-quarter performance marked the first quarter in four years, before the contract tiff with Express Scripts, that the company has solidly exceeded quarterly projections and raised earnings expectations, Miller reckoned.

“The EPS upside in the fiscal third quarter was driven predominantly by more aggressive cost controls, although Walgreens’ domestic comp-store sales and gross margins were also modestly better than Street expectations,” he wrote in his report. “This is not to say that the wind is at the company’s back; that is hardly the case, as pharmacy reimbursement pressures in the
United States are considerable. Rather, management is executing a plan with improving front-end store profitability, and pharmacy contract renewals are tracking to the company’s expectations.”

Also encouraging is the potential for Walgreens Boots Alliance to surpass its initially targeted $1.5 billion in cost savings, Miller observed. “Walgreens’ decision to maintain the fiscal 2016 outlook, despite a 20-cent increase to the fiscal 2015 view, reflects both conservatism and prudence, in our estimation, as the company intends to complete its long-range planning by the end of this fiscal year,” he added.

Analyst George Hill of Deutsche Bank Securities noted that Pessina’s appointment as CEO reflects how he has made his presence felt at Walgreens Boots Alliance.

“Already, investors can see the impact of Stefano’s leadership, with the company reducing its debt load by more than $1 billion in the current quarter and harvesting almost $1 billion in cash from real estate sale-leaseback transactions during fiscal 2015,” Hill wrote in a research note. “We expect an increased focus on capital discipline under the new management regime, which seems evident five months into their tenure.”

Editor’s Note: Article updated with analyst comment.


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