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Why We Like Walgreens, But at a Better Price

Strong international performance and pharmacy margins helped in the first quarter.

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Walgreens (WBA) recently turned in strong fiscal second-quarter results and increased its earnings growth outlook for 2021 to the mid- to high single digits from the low single digits. We were already expecting growth in the midsingle digits, so we do not expect to change our fair value estimate. However, we appreciate the more positive trends at Walgreens in recent quarters, and it appears that new CEO Rosalind Brewer has the wind at her back as she takes the reins of this top-tier retail pharmacy.

During the quarter, Walgreens beat FactSet consensus on both the top and bottom lines. Including discontinued operations, the company turned in sales of about $37.6 billion, well above consensus of $36.4 billion. Comparable-store sales increased 2% in the United States in the quarter, as the company benefited from growth in its pharmacy operations while front-of-store operations declined slightly as the weak cold and flu season remained a key constraint on results. On the bottom line, though, Walgreens performed well. Strong international performance, better pharmacy margins than expected, solid cost management, vaccination tailwinds, and a lower-than-expected tax rate helped the company turn in $1.40 per share of adjusted earnings in the quarter (including $0.14 from discontinued operations and $0.40-$0.45 of estimated COVID-19 constraints), which beat consensus of $1.09. Free cash flow in the first half of the fiscal year also increased 5%.

Julie Utterback does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.