Walgreens’ Solid Q2 Results Driven by Strong Healthcare Business

Walgreens Boots Alliance WBA reported fiscal 2023 second-quarter results that were slightly better than we anticipated. Sales grew 3.3% year over year, driven by U.S. healthcare and international, with slight offsets from the core pharmacy business. We are maintaining our $48 fair value estimate.

U.S. retail pharmacy declined 30 basis points during the quarter from a lower COVID-19 contribution and headwinds from AllianceRx. While we expect some of these pressures to persist throughout the year, we forecast them to lessen going forward. Roughly 20% of Walgreens’ locations are still operating at reduced hours amid a pharmacist shortage, which remains a problem for the industry. But we are seeing improving conditions and expect Walgreens’ increased minimum wage—to $15 across all locations, which was in effect by the beginning of 2023—to further mitigate these challenges.

International grew 1.6% year over year, or over 9% in constant currency. Boots continues to increase its presence in the U.K. retail market, marking the eighth consecutive quarter that it has gained share.

U.S. healthcare increased more than 200% in the quarter, including VillageMD’s acquisition of Summit Health in early January. Walgreens continues to show promising growth in the segment; it now operates 210 colocated VillageMD clinics, up from 200 at the end of 2022. The segment has yet to post operating profits, but we don’t see this as an issue yet because it is a new business for Walgreens and short-term restructuring and transformation costs are to be expected. We expect the firm to fuel the business with internal investments and tuck-in acquisitions to accelerate its path to profitability. However, we may see more competitive bidding for these assets going forward; for example, CVS is entering the hunt and recently announced its acquisition of Oak Street Health for over $10 billion in a deal that is expected to close in late 2023.