Walgreens stock down after disappointing results
CHICAGO -- Walgreens Boots Alliance's stock was down about 8 percent in Wednesday morning trading, a day after the company announced a $17.2 billion acquisition of Rite Aid.
One analyst said investors are disappointed with the company's fiscal fourth-quarter financial results, which were released Wednesday morning, and have concerns that Walgreens' deal to acquire one of its biggest competitors may raise antitrust issues.
The company's gross profit margin fell by about 2.5 percentage points, due to drug price inflation, reimbursement pressures and aggressive competition from mail-order pharmacies. Walgreens, based in suburban Chicago, is trying to offset the squeeze by closing stores, laying off employees and driving other operational efficiencies. The restructuring effort has produced benefits, but profit pressure remains intense.
Sales growth outside of prescriptions also came in below expectations. Same-store sales outside of pharmacy, known as the front-end of stores, grew only 0.4 percent in the fourth quarter compared with the same period a year ago. Same-store pharmacy sales increased 10 percent.
Under new management since acquiring European pharmacy chain Alliance Boots, Walgreens is trying to offset pressure on pharmacy margins by increasing front-end retail sales. It is expanding the selection of beauty products and grocery items. But the strategy puts Walgreens in direct competition with mass retailers like Target and Wal-Mart.
Vishnu Lekraj, an analyst at Morningstar, described the quarterly results as "terrible." Increasing front-end sales is a key piece of Walgreens' strategy and the lackluster performance is "not a good sign," he said.
Walgreens executives cautioned that 2015 results are not directly comparable to 2014 because of the Alliance Boots acquisition. Alliance Boots operations are included in the first eight months of the company's fiscal year, which ended Aug. 31.
The sell-off in the stock market neutralized a 6.4 percent gain in Walgreens stock on Tuesday after the company said it agreed to acquire Rite Aid. The deal would add nearly 4,600 stores to Walgreens' U.S. pharmacy network, giving it more scale to distribute beauty products and negotiate with insurance companies and other third-party players that drive much of the prescription volume to the company's stores.
But Rite Aid and Walgreens compete in several states, including California, New York and Michigan. On a conference call Wednesday, analysts asked Walgreens CEO Stefano Pessina about the possibility of having to sell stores to gain regulatory approval of the deal, but he declined to comment on potential divestitures. Walgreens has about 8,100 stores in the U.S.
To help pay for Rite Aid, Walgreens is suspending its $3 billion share buyback program. Walgreens agreed to pay $9 a share in cash for Rite Aid, or about $9.4 billion, plus the assumption of debt.
The company lowered the top end of its earnings projection for fiscal 2016 to reflect the stoppage of the share buybacks. Walgreens anticipates adjusted earnings of $4.25 to $4.55 a share. The top end had been $4.60 a share.
By the numbers: Walgreens posted net income of $26 million, or 2 cents a share, up from a loss of $221 million, or 23 cents a share, a year ago. Earnings, adjusted for nonrecurring items, were $969 million, or 88 cents a share, up from $745 million, or 77 cents a share, a year ago. Sales increased 49.7 percent to $28.5 billion, largely due to the inclusion of Alliance Boots results.
Same-store sales in the company's U.S. pharmacy business -- a key retail metric -- rose 6.5 percent in the fourth quarter and 6.4 percent for the year ended Aug. 31, driven by filling more prescriptions.
For the year, Walgreens reported net income of $4.2 billion, or $4.05 a share, up from $1.9 billion, or $2.03 a share, a year ago. Adjusted earnings were $3.88 a share, up from $3.28 a share.
Other highlights: Walgreens recorded $382 million in pre-tax charges in the quarter. Most of that was in the U.S. pharmacy business, as the company closed 75 stores, reorganized field operations and laid off staff at its headquarters.
This story was originally published October 28, 2015 at 6:27 PM with the headline "Walgreens stock down after disappointing results ."