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DEERFIELD, Ill. — The adjusted bottom line for Walgreens Boots Alliance Inc. grew by double digits during the second quarter and the first half of fiscal 2015, surpassing Wall Street’s estimates.
The adjusted bottom line for Walgreens Boots Alliance Inc. grew by double digits during the second quarter and the first half of fiscal 2015, surpassing Wall Street’s estimates.
It was the company’s first financial report since Walgreen Co.’s merger with Alliance Boots GmbH was finalized on December 31, 2014.
Figures for the three- and six-month periods ended February 28, 2015, include Alliance Boots results on a fully consolidated basis for January and February, while December results are treated as equity income from Walgreens’ pre-merger 45% stake.
Reported net income for fiscal 2015’s second quarter vaulted 185.2% to $2.04 billion, or $1.93 per diluted share. Earnings for the most recent quarter included a host of special items (all after-tax), that boosted earnings by a net of $798 million. The notable items included an $814 million gain on Walgreens’ previously held equity interest in Alliance Boots; a $376 million increase in the fair market value of stock warrants; and $157 million in acquisition-related amortization expense. Earnings for the fiscal 2014 period, meanwhile, were reduced by a net of $218 million from unusual items.
Excluding the special items in both periods, adjusted net income leapt 33.2% to $1.24 billion from $934 million. Adjusted earnings per share rose 21.6% to $1.18, well ahead of the average projection of 95 cents per share among analysts polled by FactSet.
Lifted by the inclusion of Alliance Boots results for two months, second quarter consolidated net sales soared 35.5% to $26.57 billion, shy of the FactSet forecast of $27.83 billion.
With equity earnings in Alliance Boots falling 25.7% to $101 million, reported operating income for the three months advanced 13.1% to $1.38 billion. However, backing out $463 million in special items in the most recent quarter and $191 million a year ago, adjusted operating income leapt 30.7% to $1.84 billion, nearly matching the top-line growth.
Net interest expense surged 289.2% to $144 million, but Walgreens booked a $706 million gain on a previously held equity interest as well as $504 million in other income versus other expense of $59 million in the prior-year quarter. Those factors further fueled a 117.9% jump in pretax income to $2.44 billion.
"This quarter marked a solid start for our new company, and I remain as optimistic as ever about our long-term future," said Stefano Pessina, executive vice chairman and acting chief executive officer. "At the same time, we understand the work that is needed to proactively address headwinds such as reimbursement pressure and competition."
First half net income expanded 101% to $2.89 billion on a 21.6% surge in sales to $46.13 billion. Excluding special items in both periods, adjusted earnings advanced 22.9% to $1.99 billion from $1.62 billion.
Including a 4.5% dip in equity earnings from Alliance Boots to $315 million, consolidated operating income for the half climbed 11.3% to $2.43 billion. Excluding various items, adjusted operating profit jumped 19.7% to $2.96 billion.
While interest expense escalated 155.1% to $199 million, the aforementioned $706 million gain on equity interest and a 323.5% rise in other income to $703 million helped pretax income vault 60.3% to $3.64 billion.
Walgreens Boots Alliance is now organized in three segments: Retail Pharmacy USA, which consists mainly of the previous Walgreens operation; Retail Pharmacy International; and Pharmaceutical Wholesale.
Second quarter sales for the U.S. unit increased 7.4% to $21.05 billion, propelled by a 6.9% increase in comparable-store sales that beat analysts’ target of a 5.3% rise.
Chainwide pharmacy sales climbed 10.1% to drive 64.4% of the segment’s sales, fueled by a 9.7% gain in comparable stores. The number of prescriptions dispensed rose 4.8% to 224 million (including immunizations and converting 90-day scripts to 30-day equivalents), while script count in comparable stores grew 5%.
Management noted that the strong pharmacy performance benefited from a severe cold and flu season, continued growth in Medicare Part D prescriptions and market growth.
Front-end comparable-store sales, meanwhile, improved 2.5%.
Gross margin for the segment, however, contracted 152 basis points to 27.3%, as pressures on pharmacy margins overwhelmed improvements at the front end. The margin erosion was nearly offset by a 167-basis-point drop in selling, general and administrative (SG&A) expense to 21.64% of sales, thanks mainly to store labor efficiencies, lower profit-sharing expense and store occupancy costs. With that, reported operating income gained 6.2% to $1.29 billion.
However, adjusted operating profit improved 13.5% to $1.60 billion. The adjusted results for the 2015 quarter exclude $110 million in asset impairment charges, $67 million in acquisition-related amortization, $52 million in acquisition-related costs, $16 million for optimization expenses, a $6 million decrease in the fair market value of warrants, as well as a LIFO charge of $55 million. Adjusted results for the prior-year period exclude $191 million in special items.
According to management, the strong increase in adjusted operating profit for the U.S. segment resulted from solid expense controls and efficiencies that offset the anticipated gross margin pressure from lower prescription reimbursement, generic drug price inflation and the step-down in Medicare Part D rates that began with the start of 2015.
First half operating profit for the U.S. unit grew 7.4% to $2.35 billion as sales rose 7% to $40.60 billion. Excluding various items, adjusted operating income climbed 9.9% to $2.72 billion. Comparable-store sales were up 6.3%, reflecting an 8.9% jump in pharmacy and a 2.6% gain at the front end.
During the first half, the U.S. unit opened 71 drug stores, including 25 relocations, while shuttering 46 outlets. At the end of the half it fielded a total of 8,232 drug stores, a year-over-year increase of 22, in 50 states, the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands.
Turning to the company’s two international divisions, because results represent only January and February 2015 activity, year-over-year quarterly comparisons were not available. Retail Pharmacy international generated sales of $2.05 billion for the two months. Gross margin of 36.79% was nearly matched by an SG&A ratio of 36.39% of sales, resulting in operating income of just $8 million. Excluding acquisition-related amortization expense of $117 million, though, adjusted operating income was $125 million.
On a pro forma, constant-currency basis, comparable-store sales in January and February increased 2.9% year from a year ago, reflecting a 2.9% increase at the front end and a 2.8% gain in pharmacy.
The Pharmaceutical Wholesale unit, meanwhile, reported sales of $3.87 billion, which management described as relatively flat on a pro forma basis. With gross margin of 10.01% and SG&A expense of 7.92% of sales, reported operating profit was $81 million. After excluding $33 million in acquisition-related amortization and $7 million in acquisition related costs, adjusted operating income totaled $121 million.
