Walgreen's has the Right Prescription

04/08/2020 5:00 am EST


Jason Clark

Contributing Editor, The Prudent Speculator

Drug and retail concern Walgreens Boots Alliance (WBA) reported fiscal 2020 second quarter earnings of $1.52. The figure beat consensus analyst estimates of $1.46 but was lower than the previous year quarter by 7.3% on a constant currency basis, asserts Jason Clark, value investor and contributing editor to The Prudent Speculator.

Sales in the second quarter were $35.8 billion, an increase of 3.7% from the year-ago quarter, and an increase of 4.1% on a constant currency basis. Management claims that effects from the COVID-19 pandemic largely fell outside of the quarter and were not material to Q2 results.

It also stated that the firm is currently on track to meet the guidance previously given for 2020, but has elected to revisit progress next quarter in hopes that more visibility would be available. WBA has kept stores open throughout the pandemic and has taken steps to ensure locations are safe for customers and team members.

The company has begun to provide free home delivery of prescriptions and certain products in the U.S., expanded the use of drive-thru for certain items and is partnering with U.S. and UK governments to initiate patient testing for COVID-19.

Walgreens has partnered with UnitedHealthcare to open 5 of 14 planned primary care facilities as a part of its VillageMD program to increase patient access.

Worries about exit trends and retail sales declines have knocked the already hard-hit stock down several more notches, and the shares are off by a third since the start of 2020.

Looking further than a quarter out, however, the firm says it is still on track to reach $1.8 billion annual costs savings (roughly a 7% reduction of 2019 SG&A) by 2022 and continues to purchase its own shares (driving the share count down 5% year-over-year).

We expect that a hoarding of supplies by anxious consumers pulled demand forward as COVID-19 began to spread in the U.S. and think this was largely the cause for the plunge in demand for the last week of March.

As consumers adapt to the current (admittedly abnormal) environment, we expect demand for certain in-store product categories like grocery to slightly normalize given the convenience they provide in times of need and as some grocers struggle to remain fully-stocked.

A volatile business environment is nearly certain to remain in the short-run, but we are constructive on the firm’s growth and cost-saving initiatives. Shares yield nearly 4.5% and our target price has been adjusted to $86.

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