Dive Brief:
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Shares of Walgreens Boots Alliance slipped 1.1% early Wednesday after the drugstore retailer’s fiscal second quarter earnings report missed Wall Street analyst expectations.
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Q2 adjusted diluted net earnings rose 3.8% to $1.36 per share, or 6.1% on a constant currency basis, as Q2 GAAP net earnings attributable to Walgreens Boots Alliance rose 14% to $1.06 billion from $930 million in the year-ago quarter. Sales fell 2.4% to $29.4 billion, a 0.9% increase on a constant currency basis, according to a press release.
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Walgreens Boots Alliance's international Q2 retail pharmacy sales fell 14.5% to $3.1 billion, mainly due to currency translation. Sales decreased 1.9 percent on a constant currency basis. Q2 same-store pharmacy sales declined 3.7% on a constant currency basis, primarily due to the negative impact of a reduction in pharmacy funding in the UK. Same-store retail sales rose 0.6% on a constant currency basis, reflecting growth in Boots in the U.K., Republic of Ireland and Thailand.
Dive Insight:
Overall, Walgreens Boots Alliance's second-quarter report was a mixed bag of good and bad news. While currency translations hit Walgreens Boots Alliance's international sales hard in Q2, U.S. pharmacy sales rose 3.7% year over year, accounting for 66.5% of the division's sales in the quarter. Same-store U.S. pharmacy sales grew 4.2%, primarily due to increased volume. Prescriptions rose 7.9% compared with to the year-ago quarter on Medicare Part D growth and volume growth from new pharmacy partnerships.
In all, U.S. Q2 retail sales fell 2.7% compared with the year-ago period, including the impact of the closure of some e-commerce operations. U.S. Q2 same-store retail sales fell 0.8% in what Walgreens called “a challenging market,” with declines in the consumables, general merchandise and personal care category partially offset by growth in the health and wellness and beauty. Overall U.S. Q2 sales rose 1.5% to $21.8 billion, and same-store stores grew 2.4% compared with the same quarter a year ago.
"Our results this quarter were in line with our expectations despite some challenging conditions we faced in a number of markets," CEO Stefano Pessina said in a statement. "I am particularly pleased with the growth in pharmacy volume and market share in the Retail Pharmacy USA division, which saw the highest comparable prescription growth in more than seven years. At the same time, we continue to work toward gaining regulatory approval of the pending acquisition of Rite Aid Corporation by the end of July, consistent with the amended merger agreement announced in January."
GlobalData Retail managing director Neil Saunders said in an email to Retail Dive that the challenges facing Walgreens Boots Alliance overseas are "unavoidable and are not a consequence of any real missteps on the part of Walgreens," noting “The appreciation of the dollar since this time last year, and the accompanying depreciation of [U.K.] sterling, in particular, has had a dramatic impact on sales and profit. This is exacerbated by the fact that in most of its overseas markets, and in the U.K. specifically, Walgreens operates mature businesses which produce steady uplifts rather than spectacular growth that could mask some of the effects of currency change.”
That means that Walgreens must work even harder to boost its U.S. sales, Saunders added. So far, though, the boost is coming from its pharmacies here, and not so much from its retail efforts. Indeed, Walgreens is failing to encourage customers to browse everyday items, he said, though it has done a good job with beauty merchandising: For example, the retailer last year introduced Beauty Enthusiast, a new club within its Balance Rewards loyalty program. Furthermore, Boots has long had strong-selling lines of skincare and beauty products in the U.K., and in 2015 the company purchased the Liz Earle skincare brand from Avon Products.
But “there is much more work to do on optimizing stores,” Saunders said. “Although it has some growth levers to pull, driving the topline will remain a struggle for Walgreens over the remainder of this fiscal year. As such, it is hardly surprising that the group is still pursuing the acquisition of Rite Aid.”
Saunders added that despite the ongoing delays and setbacks in that effort, Walgreens’ expectation that it will be granted regulatory approval by the end of July is well founded, though not a certainty. But it will be important for Walgreens' prospects.
“If approved, the deal would mask some of the topline challenges at the group,” he said. “[M]ore importantly, it would allow strong growth on the bottom line from synergy savings, an area where Walgreens has good form on delivering. Ultimately, the deal represents the difference between Walgreens bumping along a low growth trajectory for the next few years or accelerating ahead."