Company lowers full-year earnings outlook.

DEERFIELD, Ill. — Walgreens Boots Alliance (WBA) on Tuesday reported mixed results for its third quarter, beating analysts’ sales estimates but falling short of profit expectations.

Sales for the period ended May 31 advanced 8.6% from the year-ago quarter to $35.4 billion, topping Wall Street’s forecast of $33.79 billion. But adjusted earnings per share came in at $1.00, missing analysts’ predicted $1.06.

The company lowered its outlook for full-year adjusted EPS to $4.00 to $4.05 from  its previously expected  $4.45 to $4.65, reflecting challenging consumer and macroeconomic conditions, and lower COVID-19 vaccine and testing volumes.

Roz Brewer

“WBA achieved 8.9% constant currency sales growth in the third quarter despite a challenging operating environment. Consumers continue to appreciate the value, convenience, and range of services provided by Walgreens and Boots. However, significantly lower demand for COVID-related services, a more cautious and value-driven consumer, and a recently weaker respiratory season created margin pressures in the quarter,” said chief executive officer Rosalind Brewer.  “Our revised guidance takes an appropriately cautious forward view in light of consumer spending uncertainty, while still demonstrating clear drivers of a return to operating growth next fiscal year. We are raising our cost savings program target to $4.1 billion and taking immediate actions to optimize profitability for our U.S. Healthcare segment. I am confident that our turnaround strategy positions WBA to drive sustainable core growth and deliver long-term shareholder value.”

Overview of Third Quarter Results

The third quarter sales increase reflected growth in the U.S. Retail Pharmacy and International segments, and a significant contribution from the U.S. Healthcare segment.

Operating loss was $0.5 billion in the third quarter compared to a loss of $0.3 billion in the year-ago quarter. Operating loss in the quarter reflects a $431 million non-cash impairment of pharmacy license intangible assets in Boots UK. Adjusted operating income was $1.0 billion, an increase of 0.6 percent on a constant currency basis, reflecting improvements in U.S. core pharmacy and International growth, partly offset by lower volumes of COVID-19 vaccinations and testing, planned payroll investments in U.S. Retail Pharmacy, and investments in U.S. Healthcare.

Net earnings in the third quarter werer $118 million compared to  $289 million in the year-ago quarter, primarily driven by lower operating income. Adjusted net earnings were $860 million, up 3.4% on a constant currency basis, primarily driven by adjusted operating income.

Earnings per share in the third quarter were $0.14, compared to EPS of $0.33 in the year-ago quarter. Adjusted EPS increased 3.3%, an increase of 3.6% on a constant currency basis, despite a COVID-19 headwind of 19.5%.

Net cash used for operating activities was $20 million in the third quarter. Free cash flow was negative $444 million, a $1.7 billion decrease compared with the year-ago quarter, driven by phasing of working capital and increased capital expenditures including growth initiatives and U.S. Healthcare.

Overview of Fiscal 2023 Year-to-Date Results

Sales in the first nine months of fiscal 2023 were $103.7 billion, an increase of 3.4% from the year-ago period, and an increase of 4.8% on a constant currency basis.

Operating loss in the first nine months of fiscal 2023 was $6.4 billion compared to operating income of $2.2 billion in the year-ago period. Operating loss in the period reflects a $6.8 billion pre-tax charge for opioid-related claims and litigation. Adjusted operating income was $3.2 billion, a decrease of 26.6% on a constant currency basis, reflecting a COVID-19 headwind of approximately 22%, planned payroll investments in U.S. Retail Pharmacy and growth investments in U.S. Healthcare, partly offset by improved retail contributions in the U.S., and International growth.

For the first nine months of fiscal 2023, net loss was $2.9 billion compared to net earnings of $4.8 billion in the year-ago period. This decrease is driven by a $5.5 billion after-tax charge for opioid-related claims and litigation and lapping of a $2.5 billion after-tax gain on the Company’s investments in VillageMD and Shields Health Solutions in the year-ago period, partly offset by a $1.5 billion after-tax gain from the partial sale of the company’s investments in AmerisourceBergen and Option Care Health. Adjusted net earnings were $2.9 billion, a decrease of 20.9% on a constant currency basis, primarily driven by lower adjusted operating income.

Loss per share for the first nine months of fiscal 2023 was $3.36 compared to EPS of $5.49 from the year-ago period. Adjusted EPS decreased 21.7% to $3.32, reflecting a decrease of 20.7% on a constant currency basis, mainly due to a lower COVID-19 contribution of approximately 20 percent.

Net cash provided by operating activities was $1.2 billion in the first nine months of fiscal 2023, a decrease of $2.6 billion from the year-ago period, and free cash flow was $116 million, a decrease of $2.5 billion from the year-ago period driven by lower earnings, lower working capital contributions, and increased capital expenditures including growth initiatives.

Business Highlights

WBA continues to achieve rapid progress across its four strategic priorities, including:

Transform and align the core

• Raising Transformational Cost Management Program target from $3.5 billion to $4.1 billion in cumulative savings by fiscal 2024
• Established scalable partnership with TelePharm, part of Cardinal Health’s Outcomes business, enabling a tele-pharmacy to expand access and reach more patients in local communities
• U.S. pharmacy comparable script volume growth of 2.8% excluding immunizations
• Addressed industry-wide pharmacist labor shortage by returning an incremental ~300 stores to normal pharmacy operating hours and optimizing hours at an additional ~500 stores
• U.S. retail comparable sales decline of (0.2)%, including a 40 basis point headwind from tobacco and an 80 basis point headwind from lower levels of OTC test kits
• Operating nine automated microfulfillment centers at quarter-end, supporting ~3,900 stores
• Boots UK retail comparable sales growth of 13.4 percent, on top of robust prior year growth of 24.0%
• Launched world-first super peptide skincare range, in owned brand No7 Future Renew, with one product sold in the UK every two seconds on launch day and over 500,000 transactions in the first four weeks; launched in the U.S. in June

Build our next growth engine with consumer-centric healthcare solutions

• Service offering resonating with payers, health systems, and other partners:
  • Horizon Blue Cross Blue Shield signed on as fourth payor partner for Walgreens Health
  • Shields and CareCentrix recently contracted with leading national health solution and care delivery organization
  • Shields added six new health system partners this year
  • Clinical trials business with first eight contracts signed; achieved milestone outreach to 1 millionth patient for potential participation in trials
• Managing approximately 850,000 value-based lives under VillageMD/Summit Health
• Closed full acquisition of CareCentrix on March 31, 2023
• Closed VillageMD’s acquisition of Starling Physicians, a leading primary care and multi-specialty group in Connecticut, on March 3, 2023

Focus the portfolio; optimize capital allocation

• Exited Option Care Health stake with common stock sales in March and June, and combined after-tax cash proceeds of ~$800 million; total proceeds of $1.2 billion since August 2022
• Monetized AmerisourceBergen shares for current proceeds of approximately $1.1 billion in the third quarter and June, including Variable Prepaid Forward structure with no dilutive impact to WBA’s adj. EPS until fourth quarter fiscal 2025; total proceeds of $5.0 billion since May 2022
• Announced agreement to sell Farmacias Ahumada in Chile; transaction expected to close in calendar 2023

Build a high-performance culture and a winning team

• Aligned enterprise B2B sales and contracting teams with healthcare expertise, to sell integrated services that improve outcomes and lower cost of care for payors/health systems
• Appointed Rich Rubino as CFO of VillageMD; formerly held CFO roles at Medco Health Solutions, Aerie Pharmaceuticals, and Cedar Gate Technologies
• Appointed Beth Leonard as SVP, Chief Communications Officer; formerly held corporate affairs roles at EmblemHealth and America’s Health Insurance Plans

Business Segments

U.S. Retail Pharmacy:

The U.S. Retail Pharmacy segment had third quarter sales of $27.9 billion, an increase of 4.4 percent from the year-ago quarter. Comparable sales increased 7.0 percent from the year-ago quarter.

Pharmacy sales increased 6.3% compared to the year-ago quarter, and comparable pharmacy sales increased 9.8% benefiting from branded drug inflation. Comparable prescriptions filled in the quarter increased 1.6%, while comparable prescriptions excluding immunizations increased 2.8%. Total prescriptions filled in the quarter, including immunizations, adjusted to 30-day equivalents, increased 0.1% to 305 million. 0.8 million COVID-19 vaccinations were administered in the quarter compared to 4.7 million in the year-ago quarter.

Retail sales decreased 1.0 percent and comparable retail sales decreased 0.2 percent in the third quarter. Excluding tobacco, comparable retail sales increased 0.2 percent, led by strong results in the grocery & household and beauty categories, partly offset by a 90 basis point headwind from holiday seasonal weakness with discretionary spending pullback, and an 80 basis point headwind from lower sales of OTC test kits.

Gross profit decreased 3.1 percent compared with the year-ago quarter, and adjusted gross profit decreased 3.2 percent. Gross profit and adjusted gross profit were largely driven by a 5% headwind from a lower contribution from COVID-19 vaccination and testing.

Selling, general and administrative expenses (SG&A) decreased 12.7% to $5.0 billion, driven by a $683 million opioid-related settlement in the year-ago quarter. Adjusted SG&A decreased 5.0% to $4.5 billion, reflecting the Transformational Cost Management Program, incentive accruals, and benefits from the sale and leaseback program, partly offset by increased labor investments.

Operating income in the third quarter was $0.4 billion compared to operating loss of $90 million from the year-ago quarter due to lower selling, general and administrative expenses. Adjusted operating income decreased $4 million to $1.0 billion from the year-ago quarter, reflecting a 22 percent headwind from lower COVID-19 vaccination and testing volumes, continued reimbursement pressure, and increased labor investments.

International:

The International segment had third quarter sales of $5.6 billion, an increase of 5.0% from the year-ago quarter, held back by an adverse currency impact of 1.9 percentage points. Sales increased 6.9% on a constant currency basis, with Boots UK sales growing 10.2 percent, and the Germany wholesale business growing 3.8%.

Boots UK comparable pharmacy sales increased 5.7 percent compared with the year-ago quarter. Boots UK comparable retail sales increased 13.4% compared to the year-ago quarter, growing market share for the ninth consecutive quarter. Footfall continued to improve, increasing 7% compared to the year-ago quarter. Boots.com continued to perform strongly, with sales up over 25% compared to the year-ago quarter, accounting for over 14% of retail sales.

Gross profit increased 7.1% compared with the year-ago quarter, including an adverse currency impact of 3.1 percentage points. Adjusted gross profit increased 10.3% on a constant currency basis, with solid growth across all International markets, led by strong retail sales in the UK.

SG&A in the quarter increased 48.2% from the year-ago quarter to $1.5 billion primarily reflecting a non-cash impairment of pharmacy license intangible assets, partially offset by a favorable currency impact of 3.3 percentage points. Adjusted SG&A increased 8.3% on a constant currency basis, reflecting lapping sale and leaseback gains in the year-ago quarter, higher inflation and increased UK in-store activities.

Operating income decreased from $100 million in the year-ago quarter to a loss of $302 million. Adjusted operating income increased 19.8% to $208 million, an increase of 20.9 percent on a constant currency basis.

U.S. Healthcare:

The U.S. Healthcare segment had third quarter sales of $2.0 billion, an increase of $1.4 billion compared to the year-ago quarter. On a pro forma basis, the segment’s businesses grew sales at a combined rate of 22% in the quarter. VillageMD, including Summit Health, grew pro forma sales 22%, reflecting existing clinic growth and clinic footprint expansion. Shields grew pro forma sales 35%, driven by recent contract wins, further expansion of existing partnerships, and strong executional focus. CareCentrix grew pro forma sales 15 percent as a result of additional service offerings with existing partners.

Gross profit was $89 million as Shields and CareCentrix gross profit was partly offset by VillageMD’s expansion. VillageMD added 93 clinics compared to the year-ago quarter. Adjusted gross profit was $114 million, an increase of $135 million compared to the year-ago period as the segment continues to rapidly scale.

Third quarter SG&A was $611 million, and adjusted SG&A was $286 million. Adjusted SG&A increased by $179 million compared to the year-ago quarter, primarily due to the acquisitions of CareCentrix and Summit Health which were not included in the year-ago quarter.

Operating loss was $522 million. Adjusted operating loss was $172 million, which excludes certain costs related to stock compensation, amortization of acquired intangible assets, and acquisition related costs. Adjusted EBITDA loss was $113 million, reflecting VillageMD expansion and lower CityMD visit volume due to a weaker respiratory season, partly offset by positive contributions from Shields.

Fiscal 2023 Outlook and Preliminary Fiscal 2024 Commentary

The fourth quarter is expected to be negatively impacted by a higher effective tax rate, shifting U.S. consumer spending with heightened macro pressures, and the impact of a weaker respiratory season for both U.S. Retail Pharmacy and U.S. Healthcare. Despite these challenges, the Company expects adjusted operating income growth to accelerate in the fourth quarter from 0.6 percent in the third quarter.

For the fiscal year 2024, WBA is providing preliminary expectations for low- to mid-single digit adjusted operating income growth, with the U.S. Healthcare and U.S. Retail Pharmacy performance more than offsetting headwinds from lower sale and leaseback program benefits, lower COVID-19 contribution, and the sale of holdings in AmerisourceBergen. Adjusted operating income growth is expected to outpace adjusted EPS due to a higher tax rate and a negative impact from non-controlling interest.

The company’s fiscal year 2024 commentary reflects views on market trends and expected performance based on information available to the management team as of the date hereof. Important factors that could cause actual results to differ from these expectations are set forth below under “Forward-Looking Statements.” The company will provide detailed 2024 guidance when it reports fourth quarter and full year 2023 results.

The Company is taking immediate actions to drive sustainable growth including:

• Raising the Transformational Cost Management Program target from $3.5 billion to $4.1 billion in cumulative savings by fiscal 2024; expecting cost savings of $800 million in fiscal 2024
• Implemented capital and project spend reductions; working capital optimization program launched, benefiting fiscal 2024
• Advancing portfolio simplification to pay down debt and fund strategic initiatives
• Announcing swift actions to improve the U.S. Healthcare path to profitability, including realigned CityMD costs, accelerated VillageMD patient panel build, aggressive integration of prior Summit Health acquisitions, upgraded VillageMD management, and an increased and accelerated synergy target for VillageMD/Summit Health
• Accelerating synergies between U.S. Healthcare and Walgreens operations

The Company’s capital allocation continues to focus on core investments, debt paydown, and dividend payments.