WBA has “most difficult quarter” in its history

DEERFIELD, Ill. — Promising an aggressive response to “the most difficult quarter” Walgreens Boots Alliance Inc. has had since its creation, executive vice chairman and CEO Stefano Pessina said the company will make “a number of senior appointments,” among other changes.

Pessina made the comments in response to a 14.3% drop in second quarter net earnings compared to the year-ago period. Net earnings for the period ended February 28 fell to $1.16 billion from $1.35 billion. Adjusted net earnings decreased 11.5% to $1.5 billion, down 10.6% on a constant currency basis. The poor showing led the company to slash its guidance for fiscal 2019 earnings per share to “roughly flat.” It had projected growth of between 7% and 12%.

Sales for the quarter advanced 4.6% to $34.5 billion, rising 6.7% on a constant currency basis, including the benefit from acquired Rite Aid stores. But same-store sales in the U.S. were down 3.8%, primarily due to a weak cough, cold and flu season, continued deemphasis of products such as tobacco and lower sales of seasonal merchandise.

The CEO blamed the results on accelerating market challenges and macro trends. “During the quarter, we saw significant reimbursement pressure, compounded by lower generic deflation, as well as continued consumer market challenges in the U.S. and UK,” he said. “While we had begun initiatives to address these trends, our response was not rapid enough given market conditions, resulting in a disappointing quarter that did not meet our expectations.”

WBA will focus on addressing weaknesses, he said, making the senior appointments to bring change and accelerate the digitalization and transformation of the business. “This will include expediting the execution of our partnership initiatives, fully developing our in-store neighborhood health destinations, reimagining our front end retail offering, optimizing our store footprint and increasing the annual savings goal of our transformational cost management program from in excess of $1 billion to more than $1.5 billion.” The result will be an improved performance in fiscal 2020, he vowed, positioning the company for mid-to-high single-digit growth in adjusted EPS in the following years.

Net EPS in the quarter decreased 8.3% to $1.24, while adjusted EPS were $1.64, down 5.4% on a reported basis and 4.3% on a constant currency basis.

Operating income fell 23.3% to $1.5 billion,  primarily due to operating performance, costs related to the Transformational Cost Management Program and prior year impact of U.S. tax law changes related to AmerisourceBergen Corp. Adjusted operating income was $1.9 billion, down 10.4%, and down 9.3% on a constant currency basis, primarily due to rising reimbursement pressure in the U.S. pharmacy business with fewer opportunities for mitigation as a result of slowing deflation of generic medications. In addition, performance was impacted by weak same-store sales in U.S. retail and a challenging market in the UK.

Net cash provided by operating activities was $735 million in the second quarter, and free cash flow was $411 million.

The U.S. retail division had second quarter sales of $26.3 billion, an increase of 7.3%. Excluding the benefit from acquired Rite Aid stores, organic sales growth was 1.6% in the quarter. Pharmacy sales, which accounted for 71.9% of the division’s sales, increased 9.8% , reflecting higher prescription volumes from the acquisition of Rite Aid stores, strong growth in central specialty and a 1.9% increase in comparable pharmacy sales. The division filled 286.3 million prescriptions, including immunizations, adjusted to 30-day equivalents in the quarter, an increase of 6.4%. Prescriptions filled in comparable stores increased 1.8% .

Retail prescription market share on a 30-day adjusted basis in the second quarter increased approximately 90 basis points over the year-ago quarter to 22.3%, as reported by IQVIA.

Retail sales increased 1.3% in the second quarter, but gross profit decreased 3.2% and adjusted gross profit decreased 3.5%, primarily due to reimbursement impacts in pharmacy.

Second quarter selling, general and administrative expenses (SG&A) as a%age of sales improved 1.4 points compared with the year-ago quarter, due to continued cost saving initiatives, sales mix and bonus accrual reductions. On an adjusted basis, SG&A as a%age of sales improved 1.4%age points in the same period. The second quarter of fiscal 2019 included $40 million of costs related to previously announced store and labor investments.

Operating income in the second quarter decreased 12.6% to $1.2 billion. Adjusted operating income decreased 11.9%  to $1.5 billion, including an adverse impact of 2.4 points due to the store and labor investments.

The international retail pharmacy division had second quarter sales of $3.1 billion, a decrease of 7.1%, reflecting an adverse currency impact of 5.9%. Sales decreased 1.2% on a constant currency basis, mainly due to a 1.3% decline in Boots UK. In the UK, comparable pharmacy sales decreased 1.5% and comparable retail sales decreased 2.3%, with Boots UK broadly maintaining market share amid weakness in its categories.

Gross profit decreased 8.9%. On a constant currency basis, adjusted gross profit decreased 1.2%, due to lower sales.

SG&A as a%age of sales increased 0.5 points. Adjusted SG&A as a%age of sales, on a constant currency basis, was unchanged, with SG&A expenses reduced by 1% compared with the year-ago quarter.

Operating income in the second quarter decreased 22.6% from the year-ago quarter to $192 million, while adjusted operating income decreased 6.8% to $256 million, down 2.1% on a constant currency basis. The quarter benefited from phasing from the first quarter and bonus accrual reduction.

The pharmaceutical wholesale division had second quarter sales of $5.7 billion, down  0.3% due to an adverse currency impact of 9.4%. On a constant currency basis, sales increased 9.1%, primarily reflecting growth in emerging markets and the UK.

The division’s operating income was $100 million, which included $83 million from the company’s equity earnings in AmerisourceBergen. This compared with operating income of $323 million in the year-ago quarter, which included $202 million from the company’s equity earnings in AmerisourceBergen.

Adjusted operating income decreased 3.3% to $225 million due to the impact of currency translation. On a constant currency basis, adjusted operating income increased 3%, with sales growth and improved SG&A as a percentage of sales more than offsetting lower gross margin.