Walgreens Operating Margins Fall For Q3 2019, Full Year Guidance Maintained
Walgreens ( WBA ) announced its Q3 2019 (ended May 2019) results on June 27, 2019, followed by a conference call with analysts. The company just beat consensus for revenue which was recorded at $34.5 billion, up by 0.7% y-o-y. The Ne t earnings missed consensus and was recorded at $1.13, down from the $1.35 per share in the same period of 2018. The fall was mainly due to the impact of costs related to the Transformational Cost Management Program and a lower contribution from the company’s equity earnings in AmerisourceBergen due to the impairment of PharMEDium’s long-lived assets in the quarter.
Walgreens reported $127 billion in Total Revenues in FY 2018. This included 4 revenue streams:
Retail Pharmacy USA- Pharmacy Drugs: $65.3 billion in FY 2018 (51.4% of Total Revenues). This includes the sale of prescription drugs in the US.
Retail Pharmacy USA- OTC & Other: $27.3 billion in FY 2018 (21.5% of Total Revenues). This includes the sale of healthcare and retail products in the US.
Retail Pharmacy International: $11.8 billion in FY 2018 (9.3% of Total Revenues). This includes the sale of prescription drugs and provision of pharmacy-related services internationally.
Pharmaceutical Wholesale: $22.7 billion in FY 2018 (17.8% of Total Revenues). This includes distribution of prescription medicines to pharmacists.
Walgreens has seen a continuous rise in revenue for the past 4 quarters over the same period in the previous year. For Q3 2019 (ended May 2019) the company recorded revenue for the quarter at $34.6 billion up by 0.7% y-o-y.
Retail Pharmacy USA- Pharmacy Drugs segment has been the highest contributor to Total revenues and has seen constant growth over the years. The revenue increased from $56.8 billion in 2016 to $65.3 billion in 2018. We expect overall growth to continue at this good pace in 2019.
Retail Pharmacy USA- OTC & Other segment has remained nearly flat over the years. The revenue just increased from $27.26 billion in 2016 to $27.29 billion in 2018. We expect a slight growth in the segment for 2019.
Retail Pharmacy International segment has seen negative growth in the last few years as the average revenue per store dropped. The revenue decreased from $12.8 billion in 2016 to $11.8 billion in 2018. We expect a slight growth in the segment for 2019 as the average revenue per store metric starts to stabilize.
Trend in Expenses:
Cost of Sales is steady in the range of 75-77% of Total Revenue. In Q3 2019 (ended May 2019) the metric went up a bit to 78.5% of Total Revenue.
Selling, General and Administrative expenses contributes the second highest to Total expenses (18-21%) after Cost of Sales. In Q3 2019 (ended May 2019) it remained in range at 18.5%
Full Year Outlook:
For the full year, we expect gross revenue to increase by 6.3% to $135 billion, led by the growth in Retail Pharmacy USA- Pharmacy Drugs.
EBITDA margin is expected to increase slightly to 9.4%.
Trefis has a price estimate of $69 per share for Walgreens’ stock. The value is based on the expectation that the company will continue its steady revenue growth while improving margins.
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