Walgreens Boots Alliance Reports Fiscal 2020 Third Quarter Results
Quarterly Performance Significantly Impacted by COVID-19 Pandemic
Company Accelerates Progress on Strategic Priorities
Estimated COVID-19 impact on the third quarter
- Adverse sales impact of approximately $700 million to $750 million, almost entirely from the company’s non-U.S. businesses
- Gross margin adversely impacted by shift from higher to lower margin categories, supply chain costs
- SG&A increased due to higher employee costs and social distancing and cleaning expenses
- Both operating income and adjusted operating income included an adverse impact of $700 million to $750 million from the above items, or $0.61 to $0.65 per share, excluding impairment charges
- Most significant COVID-19 impact was in UK market, requiring a review resulting in non-cash impairment charges of $2 billion
- Company took actions to partly mitigate COVID-19 impacts
Third quarter results, year-over-year
- Sales increased 0.1 percent to $34.6 billion, up 1.2 percent on a constant currency basis, led by Retail Pharmacy USA comparable sales growth of 3.0 percent
- Operating loss of $1.6 billion, compared to operating income of $1.2 billion a year ago, mainly due to the non-cash impairment charges of $2 billion in Boots UK; Adjusted operating income decreased 46.5 percent to $919 million on a reported basis, down 46.4 percent on a constant currency basis
- Loss per share was $1.95, compared to EPS of $1.13 a year ago; Adjusted EPS decreased 43.8 percent from $1.47 to $0.83, down 43.4 percent on a constant currency basis; Results reflect $0.61 to $0.65 per share estimated operational impact from COVID-19
Significant progress on key strategic priorities
- Company accelerated investments in strategic priorities, preparing for future growth
- Company increased annual cost savings target from the Transformational Cost Management Program to in excess of $2.0 billion by fiscal 2022, from previous target in excess of $1.8 billion
- Net cash provided by operating activities was $3.4 billion, an increase of $183 million compared with the same period a year ago; Free cash flow increased 23.7 percent to $2.4 billion
- Company introduced fiscal 2020 adjusted EPS guidance of $4.65 to $4.75 including estimated COVID-19 impacts of $1.03 to $1.14 per share
- Company increased quarterly dividend by 2.2 percent, to an annual rate of $1.87 per share and suspended activity under its share repurchase program
DEERFIELD, Ill.–(BUSINESS WIRE)–Walgreens Boots Alliance, Inc. (Nasdaq: WBA) today announced financial results for the third quarter of fiscal 2020, which ended May 31, 2020.
Executive Vice Chairman and CEO Stefano Pessina said, “Prior to the pandemic our financial performance for fiscal 2020 was on track with our expectations. However, this unprecedented global crisis led to a loss in the quarter as stay-at-home orders affected all of our markets. I’m very proud of how all of our teams mobilized and adapted to deliver essential services in our communities across the world. Shopping patterns are evolving more rapidly than ever as consumers further embrace digital options, spurring us to accelerate our ongoing investments in digital transformation and neighborhood health destinations. This includes our two recent announcements: a significant expansion of our primary care clinics collaboration with VillageMD, and our strategic partnership with Microsoft and Adobe to launch a personalized omnichannel healthcare and shopping experience.”
Estimated COVID-19 Impact on WBA
The adverse impact of COVID-19 on sales in the quarter was approximately $700 million to $750 million, with the majority of the impact related to the Retail Pharmacy International division. This reflected a dramatic reduction in footfall in Boots UK stores – down 85 percent in April – as consumers were advised to leave home only for food and medicine. While most Boots stores remained open throughout the UK lockdown to provide communities with pharmacy and essential healthcare, our largest premium beauty and fragrance counters were effectively closed. More than 100 stores, mainly in high street, station and airport locations, were temporarily closed as were nearly all of the 600 Boots Opticians stores.
Globally, pharmacy volume was impacted by a drop in doctor visits and hospital patient admissions.
Additionally, gross margin was adversely impacted by sales mix, with a shift from higher margin discretionary categories to lower margin categories, and by higher supply chain costs. The company took measures to keep stores open during COVID-19, incurring incremental selling, general and administrative expenses (SG&A), including higher employee costs and store expenses related to social distancing and incremental cleaning.
As a result of these impacts, operating and adjusted operating income included an adverse impact of $700 million to $750 million, or $0.61 to $0.65 per share, excluding impairment charges.
Furthermore, considering the third quarter operating loss in Boots UK and ongoing uncertainty due to COVID-19, the company reevaluated goodwill and intangibles in Boots UK, resulting in non-cash impairment charges of $2 billion.
Accelerating Investments in Key Strategic Priorities
During the quarter the company prepared for future growth through aggressively accelerating investments in its four key strategic priorities. The impact of COVID-19 confirmed the company’s existing strategy to take bold steps in creating neighborhood health destinations, driving cost transformation, digitalization and restructuring its retail offering. Below is a summary of the most significant actions in the third quarter and since the end of the quarter:
Creating Neighborhood Health Destinations
As announced yesterday, WBA has taken an important step forward to accelerate its key strategic priority to create neighborhood health destinations, through an integrated primary care and pharmacy delivery model that will drive better health outcomes, reduce healthcare costs and provide a differentiated patient experience. WBA and VillageMD announced that Walgreens will be the first national pharmacy chain to offer full-service doctor offices co-located at its stores on a large scale, following a highly successful trial begun last year. This expanded partnership will open 500 to 700 “Village Medical at Walgreens” physician-led primary care clinics in more than 30 markets in the next five years, with the intent to build hundreds more thereafter.
The clinics will be staffed by more than 3,600 primary care providers, who will be recruited by VillageMD. The clinics will accept a wide range of health insurance options and offer comprehensive primary care across a broad range of physician services.
Under the terms of the new agreement, WBA will invest $1 billion in equity and convertible debt in VillageMD over the next three years, including a $250 million equity investment completed yesterday. Of WBA’s investment, 80 percent will be used by VillageMD to fund the opening of the clinics and build the partnership, including integration with Walgreens digital assets. It is anticipated, assuming full conversion of the debt, that WBA will hold an approximately 30 percent ownership interest in VillageMD at the completion of the investment.
In addition, during the quarter, Walgreens and Boots UK both expanded their community health roles by implementing COVID-19 testing sites.
Driving the Transformational Cost Management Program
During the quarter, the company partly mitigated the impact of COVID-19 by continuing to curtail costs while accelerating investments designed to drive long-term revenue growth. Cost containment across the company included temporary store closures, furloughing more than 16,000 UK employees at the peak of the crisis, decreasing store hours and reducing rents at some locations.
The company is moving swiftly to address the impact of COVID-19 on the Boots business by accelerating the Boots Transformation Plan. Key elements of the proposed plan include a reorganization of the Boots store employee structure, the closure of 48 Boots Opticians stores and an additional 20 percent headcount reduction in the UK support office. Subject to labor consultation, these reorganization actions will impact more than 4,000 positions (7 percent of the workforce). The Boots Transformation Plan also includes increased investment and focus on the Boots omnichannel strategy and is designed to drive future growth in the company’s UK market.
The company increased its annual cost savings target from the Transformational Cost Management Program to in excess of $2.0 billion by fiscal 2022, from the previous target, which was annual cost savings in excess of $1.8 billion by fiscal 2022.
As consumer behavior shifts rapidly, the company is increasing investments in omnichannel and in digital infrastructure. The company is seeing encouraging response from customers to its digital marketing initiatives, with the ongoing roll-out of mass personalization boosting Walgreens retail sales by 95 basis points in the third quarter. Building on that approach, the company recently announced its strategic partnership with Microsoft and Adobe to launch a marketing technology and customer data platform to deliver personalized healthcare and shopping experiences.
Transforming and Restructuring its Retail Offering
Among many examples, Walgreens substantially built up its offering of personal protective equipment (PPE), added digital ‘order ahead’ drive-thru with an increased range of products available for drive-thru pick-up, and put in place new delivery options. Walgreens total digitally initiated sales increased by 22.7 percent in the third quarter, compared with the same quarter a year ago. Boots UK also significantly boosted its Boots.com capabilities, investing in micro-fulfillment centers and hybrid stores and more than doubling capacity, which helped drive a 78 percent increase in Boots.com sales in the quarter, compared with the same quarter a year ago, with continued strong performance in June.
Overview of Third Quarter Results
Fiscal 2020 third quarter net loss attributable to WBA was $1.7 billion compared with net earnings of $1.0 billion the same quarter a year ago. Net loss per share1 was $1.95 compared with net earnings per share (EPS) of $1.13 the same quarter a year ago. The results reflect $2 billion in non-cash impairment charges related to goodwill and intangible assets in Boots UK reflecting deteriorated business conditions including the adverse impact of COVID-19 and resulting future uncertainty.
Adjusted net earnings attributable to WBA2 decreased 45.9 percent to $723 million, down 45.6 percent on a constant currency basis, compared with the same quarter a year ago. Adjusted earnings per share were $0.83 compared with $1.47 the same quarter a year ago, a decrease of 43.8 percent on a reported basis and a decrease of 43.4 percent on a constant currency basis. Results included an estimated adverse impact from the COVID-19 pandemic of $0.61 to $0.65 per share.
Sales in the third quarter were $34.6 billion, an increase of 0.1 percent from the year-ago quarter, and an increase of 1.2 percent on a constant currency basis, as the pandemic sharply curtailed footfall in retail pharmacies.
The company had an operating loss of $1.6 billion in the third quarter, compared to operating income of $1.2 billion in the same quarter a year ago, primarily due to impairment charges in Boots UK of $2 billion. Adjusted operating income was $919 million, a decrease of 46.5 percent on a reported currency basis and a decrease of 46.4 percent on a constant currency basis, including an estimated COVID-19 impact of $700 million to $750 million.
Net cash provided by operating activities was $914 million in the third quarter and free cash flow was $657 million.
Overview of Fiscal 2020 Year-to-Date Results
For the first nine months of fiscal 2020, net earnings attributable to WBA decreased 97.5 percent to $83 million compared with the same period a year ago, while net earnings per share1 decreased 97.3 percent to $0.09 compared with the same period a year ago. The results reflect the impact of impairment charges in Boots UK.
Adjusted net earnings attributable to WBA2 for the first nine months of fiscal 2020 decreased 22.6 percent to $3.3 billion, down 22.4 percent on a constant currency basis, compared with the same period a year ago. Adjusted earnings per share for the first nine months of fiscal 2020 were $3.72, a decrease of 18.5 percent on a reported basis and a decrease of 18.3 percent on a constant currency basis, compared with the same period a year ago. The results reflect an estimated adverse impact of $0.60 to $0.64 from COVID-19.
Sales in the first nine months of fiscal 2020 were $105 billion, an increase of 1.8 percent from the same period a year ago, and an increase of 2.5 percent on a constant currency basis.
Operating income in the first nine months of fiscal 2020 was $662 million, a decrease of 83.9 percent from the same period a year ago. Adjusted operating income in the first nine months of the fiscal year was $4.1 billion, a decrease of 24.1 percent from the same period a year ago on both a reported and constant currency basis.
Net cash provided by operating activities was $3.4 billion in the first nine months of fiscal 2020, an increase of $183 million from the same period last year, and free cash flow was $2.4 billion, an increase of $467 million, from the same period a year ago.
During the third quarter the company took significant proactive actions to improve financial flexibility, including securing $5.1 billion of incremental facilities.
The company introduced fiscal 2020 adjusted EPS guidance of $4.65 to $4.75, including estimated adverse COVID-19 impacts of $1.03 to $1.14 per share. This guidance assumes continued adverse impacts from COVID-19 in the fourth quarter. In the UK, retail conditions are expected to remain very depressed, despite gradual easing of restrictions. More robust sales growth is expected in the Retail Pharmacy USA division, although retail margins are expected to remain compressed in comparison to fiscal 2019. This guidance is based on sales trends the company saw in the month of June and does not factor in potential changes to those trends.
Dividend Increase and Share Repurchase Program Update
On July 8, 2020 the WBA board of directors declared a quarterly dividend of 46.75 cents per share, an increase of 2.2 percent. The increased dividend is payable September 11, 2020 to stockholders of record as of August 19, 2020, and raises the annual rate from $1.83 per share to $1.87 per share. This marks the 45th consecutive year that WBA and its predecessor company, Walgreen Co., have raised the dividend, and the 87th year a dividend has been paid.
The company also announced that it was suspending activity under its share repurchase program.
Retail Pharmacy USA:
Third quarter sales in Retail Pharmacy USA increased 3.2 percent to $27.4 billion, including the impact of previously announced store closures. Sales in comparable stores increased 3.0 percent from the year-ago quarter.
Prescriptions filled in the third quarter decreased 1.3 percent, compared with the same quarter a year earlier. In comparable stores, prescriptions filled increased 0.4 percent from a year earlier, a slower rate of growth than in the second quarter, as COVID-19 stay-at-home orders led to a drop in doctor visits and hospital admissions. The prescription volume trend has shown steady improvement since the end of May. The number of prescriptions filled was 287 million, including immunizations, adjusted to 30-day equivalents. Pharmacy sales increased 4.6 percent compared with the year-ago quarter, as higher brand inflation and a 15.9 percent increase in specialty sales offset the COVID-19 prescription volume impact. Comparable pharmacy sales increased 3.5 percent.
The division’s retail prescription market share on a 30-day adjusted basis in the third quarter was similar to the previous quarter and declined approximately 30 basis points over the year-ago quarter to 20.9 percent, as reported by IQVIA. This result included an adverse impact due to the store closures.
Retail sales decreased 0.7 percent in the third quarter compared with the year-ago period, including the impact of the store closures. Comparable retail sales were up 1.9 percent in the quarter. Excluding tobacco and e-cigarettes, comparable retail sales increased 3.5 percent. Comparable retail sales were impacted by a change in shopping patterns in the quarter, with increased demand for vitamins and PPE leading to a 9 percent increase in the health and wellness category. The personal care category increased 5 percent, while declining demand for discretionary items led to a 9 percent decrease in the beauty category. The general merchandise category was roughly flat, with an 8 percent increase in sales of grocery and household products offset by lower spending in discretionary areas, including a 34 percent decrease in photo.
Gross profit decreased 9.6 percent compared with the same quarter a year ago and adjusted gross profit decreased 8.7 percent. The company estimates that about 45 percent of the year-over-year decline in gross profit was due to impacts related to COVID-19 such as the slow-down in pharmacy volume and the adverse gross profit mix, with most of the remaining impact due to ongoing reimbursement pressure.
SG&A increased by 4.4 percent compared with the year-ago quarter, mostly reflecting costs related to the Transformational Cost Management Program, and adjusted SG&A decreased by 0.4 percent. Incremental COVID-19 related costs exceeded $100 million in the third quarter, offset by Transformational Cost Management Program savings and short-term actions to help mitigate the COVID-19 impact.
Operating income in the third quarter decreased 77.3 percent from the year-ago quarter to $226 million. Excluding costs related to the Transformational Cost Management Program, store damage and inventory loss incurred during looting in May, and the acquisition of Rite Aid stores, adjusted operating income in the third quarter decreased 38.4 percent from the year-ago quarter to $792 million. This included an estimated adverse COVID-19 impact of $325 million to $350 million or 25 to 27 percentage points.
Retail Pharmacy International:
Retail Pharmacy International had third quarter sales of $1.9 billion, a decrease of 31.5 percent from the year-ago quarter, including an adverse currency impact of 5.3 percent. Sales decreased 26.2 percent on a constant currency basis, mainly due to a 27.7 percent decrease in Boots UK sales as foot traffic in stores was severely disrupted by COVID-19 restrictions.
Boots UK comparable retail sales decreased 48.0 percent. Boots UK lost share in its categories, in a sharply lower market, as lockdown measures impacted high streets and shopping centers and compelled consumers to consolidate shopping into grocers. This decrease was partially offset by a 78 percent increase in Boots.com sales, as the pandemic restrictions boosted online sales.
Comparable pharmacy sales in Boots UK decreased 1.0 percent on a constant currency basis, reflecting lower prescription volume and reduced demand for services during the pandemic, mitigated in part by timing on National Health Service (NHS) reimbursement.
Gross profit decreased 39.6 percent compared with the same quarter a year ago, including an adverse currency impact of 4.3 percent. Adjusted gross profit decreased 36.2 percent, on a constant currency basis, reflecting lower retail sales in Boots UK and lower retail gross margin, largely due to supply chain costs.
SG&A in the quarter was $2.8 billion, up from $993 million in the year-ago quarter, due to impairment charges. Adjusted SG&A decreased by 15.3 percent, or $147 million, to $816 million, including a favorable currency impact of 5.7 percent. On a constant currency basis, adjusted SG&A decreased 9.5 percent, reflecting short-term cost mitigation initiatives and savings from the Transformational Cost Management Program.
Operating loss in the third quarter was $2.2 billion, compared to operating income of $119 million in the year-ago quarter, primarily as a result of the $2 billion in impairment charges. Adjusted operating income decreased $308 million, to an adjusted operating loss of $143 million, including a favorable currency impact of $8 million. On a constant currency basis, adjusted operating income decreased $316 million. The estimated adverse COVID-19 impact on adjusted operating income was $365 million to $390 million.
Pharmaceutical Wholesale had third quarter sales of $5.9 billion, an increase of 0.6 percent from the year-ago quarter, including an adverse currency impact of 4.8 percent. On a constant currency basis, sales increased 5.3 percent, led by the UK and Germany.
Operating income in the third quarter was $350 million, including a $243 million gain from the company’s equity earnings in AmerisourceBergen, which reported a tax benefit from the permanent shutdown of its PharMEDium compounding business. This compared with operating income of $87 million in the year-ago quarter, including a $16 million loss from the company’s equity earnings in AmerisourceBergen, which reported an impairment of PharMEDium’s assets.
Adjusted operating income increased 2.0 percent to $271 million, up 5.1 percent on a constant currency basis, reflecting sales growth and a higher contribution from AmerisourceBergen, partially offset by lower gross margin.
WBA will hold a one-hour conference call to discuss the third quarter results beginning at 8:30 a.m. Eastern time today, July 9, 2020. The conference call will be simulcast through the WBA investor relations website at: http://investor.walgreensbootsalliance.com. A replay of the conference call will be archived on the website for 12 months after the call.
The replay also will be available from 12:30 p.m. Eastern time, July 9 through July 16, 2020, by calling +1 800 585 8367 within the U.S. and Canada, or +1 416 621 4642 outside the U.S. and Canada, using replay code 1392414.
1 All references to loss per share and to EPS are to diluted loss per share and diluted EPS attributable to WBA.
2 Please see the “Supplemental Information (Unaudited) Regarding Non-GAAP Financial Measures” at the end of this press release for more detailed information regarding non-GAAP financial measures used, including all measures presented as “adjusted” or on a “constant currency” basis, and free cash flow.
Cautionary Note Regarding Forward-Looking Statements: All statements in this release that are not historical including, without limitation, those regarding estimates of and goals for future tax, financial and operating performance and results (including those under “Accelerating Progress on our Strategic Priorities” and “Company Outlook” above), the expected execution and effect of our business strategies, the potential impacts on our business of the spread and effects of the COVID-19 pandemic, our cost-savings and growth initiatives, pilot programs, strategic partnerships and initiatives, and restructuring activities and the amounts and timing of their expected impact and the delivery of annual cost savings are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
U.S. / Morry Smulevitz, +1 847 315 0517
Gerald Gradwell and Jay Spitzer, +1 847 315 2922