WBA’s Q2 results beat expectations

DEERFIELD, Ill. — Increased demand for COVID-19 tests and vaccines helped lift Walgreens Boots Alliance Inc.’s second quarter results above Wall Street’s projections, as the omicron variant peaked during the period.

WBA reported adjusted earnings of $1.59 per share in the three months ended Feb. 28. Revenue rose 3% to $33.76 billion. Analysts’ consensus estimates were adjusted earnings of $1.38 per share and $33.23 billion in revenue.

“Second quarter results demonstrated broad-based execution, driving strong comparable sales and robust earnings growth,” said chief executive officer Rosalind Brewer.  We continue to make important strides along our strategic priorities, building a consumer-centric, technology-enabled healthcare enterprise at the center of local communities. VillageMD and Shields are delivering tremendous pro forma sales growth compared to their year-ago standalone results, and our Walgreens Health segment is on track toward long-term targets. The strategic review of our Boots business is progressing, and our transformational actions are accelerating sustainable value creation,” she added.

Overview of Second Quarter Results

Sales increased 3.8 percent on a constant currency basis. The performance reflects sales growth at Walgreens and in the International segment, and sales contributions from the Walgreens Health segment due to the recent acquisitions and consolidation of VillageMD and Shields, partly offset by a decline in sales at AllianceRx Walgreens.

Operating income from continuing operations was $1.2 billion in the second quarter compared to operating income of $832 million in the year-ago quarter. Adjusted operating income from continuing operations was $1.7 billion, an increase of 35.9 percent on a constant currency basis. The increases reflect strong adjusted gross profit growth across both pharmacy and retail in the United States and a continued rebound in International segment sales and profitability, partly offset by growth investments in Walgreens Health.

Net earnings from continuing operations were $883 million in the second quarter compared to $922 million in the year-ago quarter, reflecting robust operating performance offset by the company’s equity investments, including the lapping of a gain on the partial sale of the company’s equity method investment in Option Care Health in the year-ago quarter. Adjusted net earnings from continuing operations increased 25.8 percent to $1.4 billion, up 26.4 percent on a constant currency basis compared with the year-ago quarter.

EPS from continuing operations in the second quarter was $1.02 compared to EPS of $1.06 in the year-ago quarter. Adjusted EPS increased 25.9 percent on a reported basis and an increase of 26.5 percent on a constant currency basis.

Net cash provided by operating activities was $1.1 billion in the second quarter and free cash flow was $669 million, a $431 million decrease in free cash flow compared with the year-ago quarter primarily driven by phasing of working capital, repayment of COVID-19 related government support, and increased capital expenditures in growth initiatives, including rollout of new automated microfulfillment centers and the VillageMD footprint expansion.

Overview of Fiscal 2022 Year-to-Date Results

Sales from continuing operations in the first six months of fiscal 2022 were $67.7 billion, an increase of 5.4 percent from the same period a year ago, and an increase of 5.7 percent on a constant currency basis, reflecting strong comparable sales growth at Walgreens and in the International segment.

Operating income from continuing operations in the first six months of fiscal 2022 was $2.5 billion compared to $298 million in the same period a year ago. This was partly driven by a $1.5 billion charge from the company’s equity earnings in AmerisourceBergen in the year-ago period. Adjusted operating income from continuing operations in the first six months of the fiscal year was $3.4 billion, an increase of 41.8 percent from the same period a year ago on a reported basis, and up 42.1 percent on a constant currency basis. The increases reflect strong adjusted gross profit growth across both pharmacy and retail in the United States and a continued rebound in International segment sales and profitability, partly offset by growth investments in Walgreens Health.

For the first six months of fiscal 2022, net earnings from continuing operations increased $3.9 billion compared to the same period a year earlier, to $4.5 billion, reflecting a $2.5 billion after-tax gain in the first quarter due to the valuation of the company’s previously held minority equity and debt investments in VillageMD and Shields, and the lapping of a $1.2 billion charge, net of tax, from the company’s equity earnings in AmerisourceBergen in the year-ago period. Adjusted net earnings from continuing operations increased 39.0 percent in constant currency to $2.8 billion.

EPS from continuing operations for the first six months of fiscal 2022 increased $4.54 to $5.15, compared to the same period a year ago. Adjusted EPS from continuing operations was $3.27, an increase of 38.6 percent on a reported basis and an increase of 38.8 percent on a constant currency basis.

Net cash provided by operating activities was $2.2 billion in the first six months of fiscal 2022, a decrease of $372 million from the same period last year, and free cash flow was $1.3 billion, a decrease of $550 million from the same period a year ago driven by the decline of the AllianceRx Walgreens business, phasing of working capital and increased capital expenditures in growth initiatives, including rollout of new automated microfulfillment centers and the VillageMD footprint expansion.

Business Highlights

WBA continued to execute on its strategy and achieve strong results across its businesses, including:

Growing the core

• Playing a leading role in COVID-19 vaccinations and testing
  – Walgreens administered 11.8 million vaccinations and 6.6 million tests in 2Q
  – Over 12 million boosters administered to date
  – Largest pediatric vaccine provider in the pharmacy channel
  – Launched the Walgreens COVID-19 Index to advance rapid detection of the Omicron variant and to track variant activity by state
• U.S. retail comparable sales growth of 14.7 percent was the highest in over 20 years
• Robust growth in U.S. omnichannel business with digital sales up 38 percent in 2Q, on top of 78 percent in the year-ago period, driven by 3.9 million same day pick-up orders
• MyWalgreens membership reached 96.1 million members in 2Q, up 10.9 million since 4Q
• Three automated microfulfillment centers opened, on pace to 22 centers by the end of FY24
• Reintroduction of iconic Boots 17 beauty brand in February
• Nationwide launch of Boots Price Advantage program for Advantage cardholders

Developing Walgreens Health

• Leveraging VillageMD and Shields majority investments
• Rollout of VillageMD continues with 102 co-located clinics now open, on track toward 200+ by CY22 year-end; expansion into new markets including Boston, Massachusetts; Jacksonville, Florida; and Tucson, Arizona in February; Denver, Colorado in January; and San Antonio, Texas in December
• Shields contract wins with two significant health systems with geographic reach in the Northwest and Northeast U.S.
• 47 Walgreens Health Corners launched to date, on track toward 100+ by CY22 year-end
• Added features to the Walgreens Health consumer app, including secure chat with health advisors, to increase access, engagement, and convenience
• CareCentrix closing expected by the end of 3Q, subject to regulatory approval

Refocusing the portfolio

• Strategic review of the Boots business is progressing
• Completed the consolidation of holding in AllianceRx Walgreens from 55 percent to 100 percent, on December 31, 2021
• Acquired remaining interest in Germany wholesale business on January 31, 2022

Building a high-performance culture and winning team

• Achieved recent honors, including being named to Fast Company’s list of the World’s 50 Most Innovative Companies, and Time’s 100 Most Influential Companies
• Launched FY21 Environmental, Social, and Governance (ESG) Report
• Moving to a hybrid working model, and expecting to fully reopen U.S. support offices on April 4
• Driving the national discussion on provider status for pharmacists, in recognition of their critical role in the COVID-19 response

Business Segments

United States:

The United States segment had second quarter sales of $27.7 billion, an increase of 1.2 percent from the year-ago quarter, partly offset by a decline in the AllianceRx Walgreens business. Comparable sales increased 9.5 percent from the year-ago quarter.

Pharmacy sales decreased 3.3 percent compared to the year-ago quarter, negatively impacted by a 910 basis point headwind from the AllianceRx Walgreens business. Comparable pharmacy sales increased 7.3 percent in the quarter compared to a year ago, with prescriptions filled increasing by 4.7 percent, including a positive impact of approximately 275 basis points from COVID-19 vaccinations. Total prescriptions filled in the quarter increased 3.9 percent to 300 million, including immunizations, adjusted to 30-day equivalents.

Retail sales increased 14.5 percent and comparable retail sales increased 14.7 percent compared to the year-ago quarter. Excluding tobacco and e-cigarettes, comparable retail sales increased 15.7 percent, reflecting broad based growth across all categories. In particular, health and wellness increased 43.3 percent aided by at-home COVID-19 tests and cough cold flu, and personal care and beauty increased 9.7 percent and 6.5 percent, respectively.

Gross profit increased 13.8 percent compared with the year-ago quarter. Adjusted gross profit increased 13.7 percent driven by COVID-19 vaccinations and testing and strong retail sales growth.

Selling, general and administrative expenses (SG&A) increased 4.9 percent compared to the year ago quarter. Adjusted SG&A increased 8.3 percent, driven by investments to support COVID-19 vaccinations and testing revenue growth and labor investments, partly offset by savings from the Transformational Cost Management program.

Operating income in the second quarter increased 67.9 percent to $1.4 billion compared to the year-ago quarter. Adjusted operating income increased 36.5 percent to $1.6 billion.

International:

The International segment had second quarter sales of $5.6 billion, an increase of 2.6 percent from the year-ago quarter, including an adverse currency impact of 4.9 percent. Sales increased 7.5 percent on a constant currency basis, reflecting the ongoing recovery in the UK market, despite the trading headwind created by the Omicron variant, with Boots UK sales growing 15.2 percent, and the Germany wholesale business sales up 2.5 percent.

Boots UK comparable pharmacy sales increased 3.6 percent compared to the year-ago quarter, reflecting stronger demand for pharmacy services. Boots UK comparable retail sales increased 22.0 percent compared with the year-ago quarter, with market share gains across all categories, led by beauty. Footfall improved compared to year-ago quarter, though traffic was still below pre-COVID-19 levels, with restrictions to combat the Omicron surge in place for most of the quarter. Boots.com continued to perform well, with digital sales in the second quarter up 60 percent compared to pre-COVID-19 levels in the second quarter of fiscal 2020. Boots.com accounted for over 15 percent of retail sales in the quarter, compared to pre-COVID-19 levels of 9 percent.

Gross profit increased 11.8 percent compared to the same quarter a year ago, including an adverse currency impact of 3.4 percent. Adjusted gross profit increased 15.2 percent on a constant currency basis, reflecting strong UK growth, notably from higher retail store transactions.

SG&A in the quarter increased 6.2 percent from the year-ago quarter to $1.0 billion, including a favorable currency impact of 2.9 percent. Adjusted SG&A increased 8.1 percent on a constant currency basis. The increase in both SG&A and adjusted SG&A reflects increased investments in labor, marketing and IT compared to the year-ago quarter.

Operating income grew 62.8 percent, including an adverse currency impact of 7.4 percent, to $173 million. Adjusted operating income grew to $226 million, an increase of 60.7 percent on a constant currency basis, compared to the year-ago quarter.

Walgreens Health:

The company’s Walgreens Health segment, created at the beginning of fiscal year 2022, is a consumer-centric, technology-enabled healthcare business that engages consumers through a personalized, omni-channel experience across the care journey. Walgreens Health will deliver improved health outcomes and lower costs for payors and providers by delivering care through owned and partnered assets.

The Walgreens Health segment currently consists of:

• A majority position in VillageMD, a leading, national provider of value-based primary care services;
• A majority position in Shields, a specialty pharmacy integrator and accelerator for hospitals; and
• The Walgreens Health organically-developed business that contracts with payors and providers to deliver clinical healthcare services to their members and members’ caregivers through both digital and physical channels.

The Walgreens Health segment had second quarter sales of $527 million resulting from the acquisition of VillageMD and Shields. On a pro forma basis, compared to their year-ago standalone results, these businesses grew at combined rate of 128 percent in the quarter. Shields grew 63 percent, driven by key contract wins, further expansion of existing partnerships, efficient implementation, and strong executional focus. VillageMD grew 145 percent, reflecting existing clinic growth and footprint expansion.

Gross profit and adjusted gross profit were each $15 million, both reflecting results from Shields and VillageMD. Gross profit and adjusted gross profit were driven by Shields key contract wins in the current quarter, partly offset by growth investments at VillageMD which added 82 co-located clinics versus the year-ago quarter.

Second quarter SG&A was $227 million, and adjusted SG&A was $92 million reflecting the two acquisitions, and further acceleration of investments in the Walgreens Health organically-developed business. Operating loss was $212 million. Adjusted operating loss was $77 million.