Adjusted EPS for quarter exceeds Wall Street's projection

DEERFIELD, Ill. — Walgreens Boots Alliance (WBA) reported double-digit revenue growth for its fiscal 2016 second quarter, with adjusted earnings per share topping Wall Street’s consensus forecast.

WBA said Tuesday that second-quarter sales climbed 13.6% to $30.18 billion from $26.57 billion a year earlier. The gain stemmed largely from the full consolidation of Alliance Boots for the entire quarter this year, according to the company, which added that foreign exchange negatively impacted sales by about $750 million, or 2.4%.

Net income attributable to WBA, on a GAAP basis, fell 54.5% to $930 million, or 85 cents per diluted share, in the 2016 second quarter from $2.06 billion, or $1.93 per diluted share, a year ago. WBA said the year-over-year decrease reflects a noncash gain of $814 million, or 77 cents per diluted share, in the 2015 quarter related to the Dec. 31, 2014, remeasurement to fair value of the company’s equity investment in Alliance Boots and fluctuations in the quarterly fair value adjustments of its AmerisourceBergen Corp. warrants.

Adjusted net earnings attributable to WBA for the 2016 quarter rose 14.4% to $1.42 billion, or $1.31 per diluted share, from $1.24 billion, or $1.18 per diluted share, in the prior-year period. The company said fiscal 2016 second-quarter earnings adjustments were a net increase to GAAP net income attributable to WBA of $493 million, or 46 cents per diluted share.

On average, analysts had projected WBA’s adjusted EPS for the 2016 second quarter at $1.28, with estimated ranging from a low of $1.19 to a high of $1.38, according to Thomson Financial.

“I am pleased with how we are working across the company to transform our businesses and position ourselves for success in rapidly changing markets,” Stefano Pessina, executive vice chairman and chief executive officer of Walgreens Boots Alliance, said in a statement. “In addition, we continued to make good progress in the quarter in reducing costs and establishing more efficient working practices, which contributed to overall adjusted earnings growth.

“Looking ahead, we remain on track to achieve our expectations for this fiscal year, as we work to mitigate lower pharmacy reimbursement rates and challenging retail sales environments,” Pessina added.

In the Retail Pharmacy USA division, which includes the Walgreens and Duane Reade, 2016 second-quarter sales totaled $21.5 billion, up 2.1% from $21.05 billion a year earlier. Same-store sales edged up 2.2% year over year.

WBA said same-store sales in the front end dipped 0.3% in the second quarter, mainly because of soft cough, cold and flu product sales, which had an negative impact of about 100 basis points on comparable retail sales in the period. Gift product sales were strong during the holiday season, and wellness products like vitamins and first aid, along with exclusive brands such as the No7 beauty care label, also performed well in the quarter, the company reported.

Pharmacy sales, which represented 65% of the USA division’s total sales in the quarter, rose 3.2% overall and 3.7% on a comparable-store basis. Prescription count totaled 233 million (including immunizations) adjusted to 30-day equivalents in the quarter, up 3.9% from a year earlier. WBA noted that incidence of flu across the United States declined 16% versus a year ago, according to IMS Health.

Prescriptions filled in comparable stores rose 2.8% for the second quarter, fueled by growth in Medicare Part D prescriptions, while a weak cough, cold and flu season had a negative impact of about 30 basis points, according to WBA. The USA division’s retail prescription market share, on a 30-day adjusted basis, increased 20 basis points in the quarter to 19.5%, as reported by IMS Health.

Retail Pharmacy USA’s operating income, on a GAAP basis, came in at $1.43 billion for the 2016 second quarter, a gain of 10.6% year over year. Adjusted operating income was $1.63 billion, up 2.1%. Excluding the impact from Alliance Boots equity income, the division’s adjusted operating income in the quarter rose 10% from a year ago, WBA said.

Overall, WBA posted operating cash flow of $2.4 billion on a GAAP basis in the second quarter, and the company generated free cash flow of $2 billion.

Combined net synergies, related to the strategic combination of Walgreens and Alliance Boots, totaled $329 million in the second quarter and $617 million in the first six months of fiscal 2016. WBA said it continues to expect to reach at least $1 billion in combined net synergies in fiscal 2016. That excludes the synergy benefits from WBA’s long-term relationship with AmerisourceBergen, the benefits of refinancing the legacy Alliance Boots indebtedness at a lower cost and the proposed Rite Aid Corp. acquisition, the company noted.

WBA said the acquisition of Rite Aid “is progressing as planned” and that, pending regulatory approval and other customary closing conditions, it continues to expect the transaction to close in the second half of calendar 2016. WBA added that it’s continuing its integration planning for the acquisition.

For the full 2016 fiscal year, WBA raised the low end of its adjusted diluted EPS outlook by 5 cents, to between $4.35 and $4.55. The company said the guidance continues to assume no material accretion from the proposed Rite Aid acquisition, equity income from AmerisourceBergen on a two-month reporting lag, and no significant changes in currency exchange rates.

Analysts’ consensus estimate pegs WBA’s fiscal 2016 adjusted EPS at $4.48, with projections running from a low of $4.35 to a high of $4.61, according to Thomson Financial.