Walgreens Earnings: Tough Year Finishes With Disappointing Results and Challenges Likely in 2024

No-moat Walgreens Boots Alliance WBA reported weaker-than-expected fiscal fourth-quarter earnings, marking the end of a challenging year. Quarterly sales were up 9.2% year over year, but adjusted EPS of $0.67 fell 18% on constant currency. Walgreens continues to see headwinds in its overall business, including a normalization of respiratory events, lower COVID-19-related contributions (400,000 COVID-19 vaccinations administered in the fourth quarter versus 2.9 million in the prior-year quarter), labor pressures, shifting consumer behaviors, and a challenging macroeconomic environment. While year-over-year comparisons for 2024 appear likely to ease, these challenges may creep into next year, judging by the firm’s adjusted 2024 EPS guidance of $3.20-$3.50 compared with 2023′s $3.98. After updating our model for these near-term headwinds, we expect to lower our fair value estimate by a mid-single-digit percentage.

In the quarter, U.S. retail pharmacy was up 3.7% year over year thanks to strong comparable pharmacy sales, offset by weak retail sales, which were down 4.3%. Lower contributions from COVID-19-related items and weak prescription volume affected both channels. While we forecast some minor tailwinds from updated COVID vaccines in the first quarter of 2024, we expect full-year effects to be minimal.

The international segment had a solid quarter, with sales up 12.4%. An uptick in foot traffic, increase in basket size, and strong expansion in online sales drove growth across all categories, despite similar challenges to the U.S. market.

U.S. healthcare, a segment that we see as a key catalyst for future growth, reported roughly $2 billion in sales during the quarter with continued improvement in gross and operating margin. While scaling this business through clinic footprint expansion and key contract wins remains a positive sign, bottom-line growth has been slower than we expected, which continued quarter over quarter.