Walgreens reports fiscal Q3 net earning down 73.8% from a year ago to US$289.0M due to opioid settlement with Florida, drop in US pharmacy operations, with sales down 4.2% year-over-year to US$32.6B; US segment sales down 7.1% from a year ago to US$26.7B

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July 8, 2022 (press release) –

Walgreens Boots Alliance reported financial results for the third quarter of fiscal 2022, which ended May 31.

Chief Executive Officer Rosalind Brewer said:

"WBA delivered strong execution across operating segments and against very robust growth last year. Third quarter results were broadly in line with our expectations, demonstrating the resilience of our business through our deep community connections and relevance to consumers. Walgreens Health achieved 65 percent pro forma sales growth with progress on several fronts, including adding Buckeye Health Plan as a strategic partner, already exceeding our 2022 target for covered lives, and launching our clinical trials business. With our decision to conclude the Boots strategic review, I firmly believe that our strategic actions are working to deliver long-term shareholder value."

In a release on June 29, the Company provided the following highlights:

Overview of Third Quarter Results

WBA third quarter sales from continuing operations decreased 4.2 percent from the year-ago quarter to $32.6 billion, a decrease of 2.8 percent on a constant currency basis. Sales growth at Walgreens and in the International segment, and sales contributions from the Walgreens Health segment were more than offset by a 720 basis point impact from the sales decline at AllianceRx Walgreens.

Third quarter operating loss from continuing operations was $320 million compared to operating income of $1.1 billion in the year-ago quarter. Operating loss in the quarter reflects a $683 million charge related to the opioid settlement with the State of Florida and higher costs related to the Transformational Cost Management Program. Adjusted operating income from continuing operations was $1.0 billion, a decrease of 33.5 percent on a constant currency basis. The decline in both adjusted and operating income reflects a decrease in U.S. pharmacy operating result as it lapped prior year peak COVID-19 vaccinations, and growth investments in Walgreens Health, partly offset by improved retail contributions in both the U.S. and International segments.

Net earnings from continuing operations decreased 73.8 percent to $289 million compared to $1.1 billion in the year-ago quarter. The decline reflects the opioid settlement with the State of Florida, a decrease in U.S. pharmacy operating results as it lapped prior year peak COVID-19 vaccinations, and growth investments in Walgreens Health, partly offset by a gain on the partial sale of the company's equity method investment in AmerisourceBergen and the favorable impact of a lower tax rate compared with the year-ago quarter, as well as improved retail contributions in both the U.S. and International segments. Adjusted net earnings from continuing operations decreased 30.2 percent to $834 million, down 29.1 percent on a constant currency basis compared with the year-ago quarter.

EPS from continuing operations decreased 73.8 percent to $0.33 compared to EPS of $1.27 in the year-ago quarter. Adjusted EPS from continuing operations was $0.96, a decrease of 30.0 percent on a reported basis and a decrease of 28.9 percent on a constant currency basis.

Net cash provided by operating activities was $1.6 billion in the third quarter and free cash flow was $1.3 billion, a $187 million decrease in free cash flow compared with the year-ago quarter driven primarily by lower U.S. operating income, reduced volume from the AllianceRx Walgreens business, and increased capital expenditures in growth initiatives, partly offset by working capital.

Overview of Fiscal 2022 Year-to-Date Results

Sales from continuing operations in the first nine months of fiscal 2022 were $100.3 billion, an increase of 2.0 percent from the same period a year ago, and an increase of 2.7 percent on a constant currency basis, reflecting comparable sales growth at Walgreens and in the International segment and contributions from Walgreens Health acquisitions, partly offset by a decline in sales at AllianceRx Walgreens.

Operating income from continuing operations in the first nine months of fiscal 2022 increased 54.3 percent to $2.2 billion compared to $1.4 billion in the same period a year ago. This reflects a $1.5 billion charge to the company's equity earnings from AmerisourceBergen in the prior fiscal year, partly offset by a $683 million charge related to the opioid settlement with the State of Florida in the current quarter. Adjusted operating income from continuing operations in the first nine months of the fiscal year was $4.4 billion, an increase of 13.1 percent from the same period a year ago on a reported basis, and up 13.7 percent on a constant currency basis. The increase reflects adjusted gross profit growth across both pharmacy and retail in the United States and a continued rebound in International segment sales and profitability, partly offset by growth investments in Walgreens Health.

For the first nine months of fiscal 2022, net earnings from continuing operations increased $3.1 billion compared to the same period a year earlier, to $4.8 billion, reflecting a $2.5 billion after-tax gain in the first quarter due to the remeasurement of the company's previously held investments in VillageMD and Shields, and a $1.2 billion charge, net of tax, in the prior fiscal year from the company's equity earnings in AmerisourceBergen. This was partly offset by the charge related to the Florida opioid settlement in the current quarter. Adjusted net earnings from continuing operations increased 13.3 percent to $3.7 billion, up 13.9 percent on a constant currency basis.

EPS from continuing operations for the first nine months of fiscal 2022 increased $3.60 to $5.49, compared to the same period a year ago. Adjusted EPS from continuing operations was $4.23, an increase of 13.3 percent from the same period a year ago on a reported basis and an increase of 13.9 percent on a constant currency basis.

Net cash provided by operating activities was $3.8 billion in the first nine months of fiscal 2022, a decrease of $497 million from the same period last year, and free cash flow was $2.6 billion, a decrease of $737 million from the same period a year ago driven by reduced volume from the AllianceRx Walgreens business, the absence of COVID-19 related government support, and increased capital expenditures in growth initiatives, including the VillageMD footprint expansion and the rollout of new automated microfulfillment centers, partly offset by working capital initiatives and timing benefits.

Business Highlights

WBA continued to execute on its strategy and achieve robust results across its businesses, including:

Growing the core

-Playing a leading role in COVID-19 vaccinations and testing

- Walgreens administered 4.7 million vaccinations and 3.9 million tests in 3Q

- Over 16 million boosters administered for the program to date

-U.S. retail comparable sales growth of 1.4 percent, or 2.4 percent excluding tobacco

-U.S. digital sales growth of 25 percent in 3Q, on top of 95 percent in the year-ago period, driven by 2.8 million same day pick-up orders

-Grew MyWalgreens membership to over 99 million members at the end of 3Q

-Recently opened fourth automated microfulfillment center, supporting ~1,100 stores total with more locations being added as these facilities become fully operational

-Expanded the company's partnership with ALTO US, a provider of innovative loss prevention and tech-enabled security services, across more than 2,200 stores nationwide

-Boots UK retail comparable sales growth of 24.0 percent

-Launched No7 Pro Derm Scan technology and personalized consultation service in over 400 Boots stores in April

-Reached nearly 500,000 customer orders for innovative digital healthcare service Boots Online Doctor since launching a year ago

-Focusing labor investments to return ~3,000 stores to normal operating hours

Developing Walgreens Health

-Announced strategic partnership with Buckeye Health Plan, with over 400,000 covered lives

-Exceeded 2 million target for covered lives by end of CY22, with access to 2.3 million patients

-Launched clinical trials business, leveraging WBA's consumer-centric model to improve access and diversity

-CareCentrix transaction now expected by the end of 4Q, subject to regulatory approval

-Continued the rollout of VillageMD with 120 co-located clinics now open, on track toward 200 by end of CY22

-Shields contract wins with three significant health systems

-Established 56 Walgreens Health Corners to date, on track toward 100 by end of CY22

-Over 60,000 consumer conversations conducted by Walgreens Health Corner Advisors in 3Q

Refocusing the portfolio and optimizing capital allocation

-Sold 6.0 million shares of AmerisourceBergen common stock, with proceeds of $900 million

-Provided notice for the early repayment of the $731.4 million due with the company's September 2022 notes, taking place on July 5,

-Completion of Boots strategic review, with decision to retain the business

Building a high-performance culture and winning team

-Appointed three executives to Walgreens retail products and customer leadership team: Linh Peters as SVP and Chief Marketing Officer, Luke Rauch as SVP and Chief Merchandising Officer, and Bala Visalatha as SVP and Chief Product Officer

-Introduced Be Well Connected, the company's team member program for mental health and wellbeing

-Improved the company's global engagement score to 72, an increase of 2 points from the September 2021 level

-Celebrated Red Nose Day for the eighth consecutive year as the exclusive retailer of the nationwide campaign to help end the cycle of child poverty and ensure a healthy future for all children

- Red Nose Day has raised $275 million since launching in the U.S. in 2015, positively impacting the lives of 30 million children, and Walgreens has raised more than $140 million toward that total

Business Segments

United States:

The United States segment had third quarter sales of $26.7 billion, a decrease of 7.1 percent from the year-ago quarter, driven by a decline in the AllianceRx Walgreens business. Comparable sales increased 1.8 percent from the year-ago quarter.

Pharmacy sales decreased 9.7 percent compared to the year-ago quarter, negatively impacted by an 11 percentage point headwind from the AllianceRx Walgreens business. Comparable pharmacy sales increased 2.0 percent in the quarter compared to a year ago. Comparable prescriptions filled decreased 1.8 percent; excluding immunizations, comparable prescriptions increased 2.1 percent. Total prescriptions filled in the quarter decreased 2.5 percent to 304 million, including immunizations, adjusted to 30-day equivalents.

Retail sales increased 1.0 percent and comparable retail sales increased 1.4 percent compared to the year-ago quarter. Excluding tobacco and e-cigarettes, comparable retail sales increased 2.4 percent. The increase reflects strong growth in health and wellness, which increased 7.9 percent aided by at-home COVID-19 tests and cough cold flu and a 2.6 percent increase in personal care, partly offset by beauty, and consumables and general merchandise, which decreased 0.4 percent and 1.9 percent, respectively. Consumables and general merchandise lapped strong sales in COVID-19 related items and were impacted by the planned decline in tobacco.

Gross profit decreased 9.8 percent to $5.5 billion compared to $6.1 billion in the year-ago quarter. Adjusted gross profit decreased 9.6 percent to $5.6 billion compared to the year-ago quarter, reflecting a decline in pharmacy results as it lapped prior year peak COVID-19 vaccinations, partly offset by positive contributions from retail performance.

Selling, general and administrative expenses (SG&A) increased 15.0 percent to $5.7 billion compared to $5.0 billion in the year ago quarter, including a $683 million charge related to an accrual for the aforementioned opioid settlement with the State of Florida and higher costs related to the Transformational Cost Management Program. Adjusted SG&A decreased 0.9 percent to $4.8 billion, driven by lower volumes of COVID-19 vaccinations and cost discipline, partly offset by increased labor costs and the timing of marketing expenditures.

Operating loss in the third quarter decreased to $90 million compared to operating income of $1.2 billion in the year-ago quarter reflecting the opioid settlement with the State of Florida and higher Transformational Cost Management Program costs. Adjusted operating income decreased 34.4 percent to $966 million compared to $1.5 billion in the year-ago quarter reflecting strong prior period results which included peak COVID-19 vaccination volumes, with positive contributions from growth at retail in the current period.

International:

The International segment had third quarter sales of $5.3 billion, an increase of 0.3 percent from the year-ago quarter, including an adverse currency impact of 9.0 percent. Sales increased 9.3 percent on a constant currency basis, with Boots UK sales growing 13.5 percent, and our German wholesale business growing 6.8 percent.

Boots UK comparable pharmacy sales decreased 0.4 percent compared to the year-ago quarter. Growth in comparable National Health Service (NHS) volumes was more than offset by favorable timing on NHS reimbursement in the year-ago quarter. Boots UK comparable retail sales increased 24.0 percent compared to the year-ago quarter, with market share gains across all categories, led by beauty. Footfall improved compared to the year-ago quarter; however, traffic remains below pre-COVID-19 levels. Boots.com continued to perform well, accounting for over 13 percent of retail sales in the quarter compared to 6 percent pre-pandemic.

Gross profit increased 3.2 percent compared to the same quarter a year ago, including an adverse currency impact of 8.0 percent. Adjusted gross profit increased 11.3 percent on a constant currency basis, reflecting strong sales growth in the UK.

SG&A in the quarter decreased 2.9 percent from the year-ago quarter to $1.0 billion, including a favorable currency impact of 7.0 percent. Adjusted SG&A increased 2.4 percent on a constant currency basis. Excluding currency impacts, the increase in both SG&A and adjusted SG&A reflects increased investments in labor and marketing, and COVID-19 related government support in the year-ago quarter, partly offset by a gain in the UK from a leaseback transaction.

Operating income increased to $100 million compared to $36 million in the year-ago quarter. Operating income was negatively impacted 36.9 percentage points ($13 million) as a result of currency translation. Adjusted operating income grew strongly to $174 million, more than doubling the year-ago quarter on a constant currency basis.

Walgreens Health:

The company's Walgreens Health segment, created at the beginning of fiscal year 2022, is a consumer-centric, technology-enabled healthcare business that engages consumers through a personalized, omnichannel experience across the care journey. Walgreens Health will deliver improved health outcomes and lower costs for payors and providers by delivering care through owned and partnered assets.

The Walgreens Health segment currently consists of:

-A majority position in VillageMD, a leading, national provider of value-based primary care services;

-A majority position in Shields, a specialty pharmacy integrator and accelerator for hospitals; and

-The Walgreens Health organically-developed business that contracts with payors and providers to deliver clinical healthcare services to their members and members' caregivers through both digital and physical channels.

The Walgreens Health segment had third quarter sales of $596 million. On a pro forma basis, compared to their year-ago standalone results, these businesses grew sales at a combined rate of 65 percent in the quarter. Shields grew 47 percent, driven by key contract wins, further expansion of existing partnerships, and strong executional focus. VillageMD grew 69 percent, reflecting existing clinic growth and footprint expansion.

Gross loss and adjusted gross loss were each $21 million. Shields gross profit, driven by further growth at existing partnerships and expanding margins, was more than offset by growth investments at VillageMD. As of the end of the third quarter, VillageMD had 315 total clinics open, an increase of 97 clinics compared to the year-ago quarter.

Third quarter SG&A was $213 million, and adjusted SG&A was $108 million reflecting the two acquisitions, as well as continued investments in the Walgreens Health organically-developed business. Adjusted SG&A excludes certain costs related to stock compensation expense and amortization of acquired intangible assets. Operating loss was $234 million. Adjusted operating loss was $129 million.

More information:

walgreensbootsalliance.com

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