Walgreens Earnings: Poor Results Due to Low COVID-19 Sales, Cautious Consumers, Weak Cough Season

Walgreens Stock at a Glance

• Fair Value Estimate: $40
• Morningstar Rating: 4 stars
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: None

Walgreens Earnings Update

Walgreens Boots Alliance’s WBA fiscal third-quarter results were below our expectations. Total sales were up 8.6% year over year, but the company generated an operating loss against a difficult backdrop of significantly lower demand for COVID-19-related services, price-sensitive consumers, and slower-than-expected profit growth for the U.S. healthcare segment. We have lowered our fair value estimate to $40 per share from $48 to reflect that slower growth, as well as reduced margin expectations for 2023 and beyond.

U.S. pharmacy sales were up 6.3%, thanks to branded drug inflation and higher prescription volume. But U.S. retail sales declined 100 basis points as consumers pulled back discretionary spending. In an inflationary environment, consumers become more price-sensitive, seeking cheaper and value-based alternatives. Because Walgreens offers the convenience of shopping and picking up prescriptions under the same roof, it charges a premium for its retail items, which is not currently favored by consumers.

Additionally, the quarter delivered significantly lower COVID-19 contributions. Walgreens administered 800,000 COVID-19 vaccines, down 83% year over year. And the segment posted lower margins from a weak respiratory season which resulted in a lower volume of high-margin cough category items. Walgreens is working to combat these headwinds by returning more pharmacies to regular hours and setting up micro-fulfillment centers, but we do not expect this will materially improve margins.

U.S. healthcare sales reached $2 billion during the quarter, up from $600 million last year. While the segment’s sales are nicely ramping up to our expected level for 2023, the same cannot be said for its margins. Disappointing results from VillageMD and CityMD (again, mainly stemming from low COVID-19 contributions and the weak respiratory season) posed a challenge for segment margins during the quarter.

To improve margins, Walgreens plans to leverage its size and reach to campaign for an increased patient base, drive density in existing markets, and optimize its cost structure. While we appreciate these initiatives, we remain cautious about their future success and have dialed down our forecast pace of margin expansion for the segment.

Management drastically slashed adjusted earnings per share guidance for the year to $4.00-$4.05 from $4.45-$4.65 based on an updated outlook for COVID-19 services contributions (cutting COVID-19 vaccinations expectations for the year to 12.5 million from 16 million) and foreign exchange.