DEERFIELD, Ill. — Walgreens Boots Alliance’s (WBA’s) third quarter profit beat analysts’ expectations, as U.S. pharmacy sales rose 4.3% in the period ended May 31.
Net earnings slipped 23.6% to $1 billion compared to the year-ago quarter, while net earnings per share decreased 16.5% to $1.13. Stripping out special items, the company earned $1.47 per share, beating analysts’ forecasts of $1.43 per share. Adjusted earnings per share were down 4% on a reported basis and 2.4% on a constant currency basis.
For the full fiscal year, WBA maintained adjusted EPS guidance of roughly flat, at constant currency rates. On a reported currency basis, the company anticipates approximately $0.06 per share of adverse currency impact.
“Following a difficult second quarter, we made progress in the third quarter against the strategic goals we set, and are pleased to report an improvement in our U.S. comparable growth compared with the first half of the year,” said executive vice chairman and chief executive officer Stefano Pessina. “We will continue our aggressive response to rapidly shifting trends, and have already seen improved U.S. retail sales and prescription growth and are making good progress in implementing our Transformational Cost Management program. Together, this gives us the confidence to reiterate the fiscal 2019 guidance we previously provided.”
Company sales rose 0.7% to $34.6 billion, increasing 2.9% on a constant currency basis, primarily due to growth in the Retail Pharmacy USA and Pharmaceutical Wholesale divisions.
Operating income was $1.2 billion, a decrease of 24.7%, including the impact of costs related to the Transformational Cost Management program and a lower contribution from the company’s equity earnings in AmerisourceBergen Corp. due to the impairment of PharMEDium’s long-lived assets in the quarter. Adjusted operating income was $1.7 billion, a drop of 11.7%, or 10.4% on a constant currency basis, primarily due to lower U.S. pharmacy margins and retail sales, and Boots UK.
Net cash provided by operating activities was $2 billion in the third quarter, and free cash flow was $1.6 billion.
Retail Pharmacy USA saw third quarter sales climb 2.3% to $26.5 billion. Excluding the impact of store optimization following the acquisition of Rite Aid stores, organic sales growth was 2.9%.
Pharmacy sales, which accounted for 73.9% of the division’s total sales, increased 4.3%, reflecting higher brand inflation and prescription volume, and strong growth in central specialty. Comparable pharmacy sales increased 6%. The division filled 290.7 million prescriptions, including immunizations, adjusted to 30-day equivalents in the quarter, an increase of 1.9%. Prescriptions filled in comparable stores increased 4.7% from the same quarter a year ago.
Retail prescription market share on a 30-day adjusted basis decreased approximately 50 basis points to 21.2%, as reported by IQVIA. This decrease reflects store optimization.
Front-end sales decreased 2.9% in the third quarter compared with the year-ago period, including the impact of store optimization following the acquisition of Rite Aid stores. Comparable retail sales were down 1.1% in the quarter, primarily due to continued de-emphasis of tobacco.
Gross profit decreased 3.6% and adjusted gross profit decreased 3.9%, primarily due to reimbursement pressure in pharmacy and lower front-end sales.
Third quarter selling, general and administrative expenses (SG&A) as a percentage of sales improved three-tenths of a point compared with the year-ago quarter. On an adjusted basis, SG&A as a percentage of sales improved a half-point. The quarter included $40 million of costs related to previously announced store and labor investments.
Operating income decreased 20.6% to $1.0 billion. Adjusted operating income decreased 13.8% to $1.3 billion. The decreases include an adverse impact of 3.2 percentage points and 2.7 points, respectively, from the store and labor investments mentioned above.
Retail Pharmacy International had third quarter sales of $2.8 billion, a decrease of 7.3%, reflecting an adverse currency impact of 5.7%. Sales decreased 1.6% on a constant currency basis, mainly due to a 1% decline in Boots UK. In the UK, comparable pharmacy sales increased 0.8% and comparable retail sales decreased 2.6% with Boots broadly gaining retail market share amid weakness in certain categories.
Gross profit decreased 8.5% and, on a constant currency basis, adjusted gross profit decreased 1.6%, due to lower pharmacy margin and retail sales at Boots UK.
SG&A as a percentage of sales increased eight-tenths of a point. Adjusted SG&A as a percentage of sales, on a constant currency basis, increased six-tenths of a point.
Operating income in the third quarter decreased 28.6% to $119 million, while adjusted operating income decreased 14.9% to $165 million, down 10.5% on a constant currency basis.
Pharmaceutical Wholesale had third quarter sales of $5.9 billion, down 1.7%, due to an adverse currency impact of 10%. On a constant currency basis, sales increased 8.3%, primarily reflecting growth in emerging markets.
Operating income was $87 million, which included a loss of $16 million from the company’s equity earnings in AmerisourceBergen due to the impairment of PharMEDium’s long-lived assets. This compared with operating income of $177 million in the year-ago quarter, which included $52 million from the company’s equity earnings in AmerisourceBergen.
Adjusted operating income increased 2.6% to $265 million. On a constant currency basis, adjusted operating income increased 9.4%.