Walgreens Slides As Covid Shots, Testing Boost Seen Fading

(Bloomberg) -- Walgreens Boots Alliance Inc. shares slid Thursday after the drugstore chain signaled earnings growth would slow and investments would increase in the coming months.

The shares fell 5.4% at 1:49 p.m. in New York after earlier losing as much as 8.7%, their biggest intraday loss since November. They had risen 4% before U.S. markets opened after the company raised its annual forecast.

Walgreens impressed the Street with its fiscal third-quarter results, posting adjusted earnings from continuing operations of $1.38 a share, well exceeding the $1.17 a share that analysts surveyed by Bloomberg had expected. Revenue was $34 billion, roughly matching estimates.

The company said full-year earnings will grow 10% in constant currency, up from the previously forecast range of mid-to-high single digits. But in the context of a blowout quarter, the new estimate showed Walgreens anticipates earnings growth to slow in the final period of its fiscal year.

Covid-19 vaccines gave Walgreens a much-needed boost. The company administered 17 million Covid-19 vaccines in the quarter, bringing the total to 25 million since the U.S. rollout started last December, Chief Financial Officer James Kehoe said during the call. Most of that momentum has likely passed, with the majority of adults already immunized and the rest either uncertain or unconvinced about the shots.

Walgreens said it now expects to give 28 million shots by the end of its fiscal year, which ends in August. It had anticipated administering 26 million to 34 million.

Longstanding challenges will now return to focus, such as insurers paying pharmacies less for dispensing prescription drugs, an especially important issue for Walgreens since about three-quarters of its U.S. sales come from the pharmacy counter.

“The business model is not changing because of one quarter,” Kehoe said.

Chief Executive Officer Roz Brewer sketched some of her ideas during a call with analysts while promising to share more details later this fall. The lack of a concrete plan and the prospect of a multi-year timeline for some costly investments to show a return left some investors feeling underwhelmed, according to analysts.

“It’s a show-me story,” said JPMorgan analyst Lisa Gill. “It’s going to take awhile.”

Business Pressure

Brewer, who took the helm in March, said Walgreens will use the proceeds from its $6.5 billion sale of its wholesale pharmacy business to AmerisourceBergen Corp. to accelerate its investments.

Walgreens plans to build neighborhood health destinations around a modern pharmacy, rethink its retail offerings and reduce its costs, the CEO said. The company’s heard from customers that they’re often overwhelmed trying to manage various health conditions, doctors, bills and medications, and sees opportunity there as well.

“We know we can help them address these problems in a way that builds on our strengths and establishes even deeper relationships with them,” Brewer said.

The CEO said she’s still reviewing Walgreens’ long-term business plans and will share more details in the future. Vaccine-related costs will hamper fourth-quarter results, Kehoe said, as will investments in store and digital products.

Some of those initiatives could take years to pay off. For example, Walgreens said its work building mini prescription fulfillment centers enhanced by artificial intelligence is a two-to-three-year journey.

“We don’t know what level of investments and how long those would last,” said Jefferies analyst Brian Tanquilut. “The core business might be recovering, you just don’t know how things would look for 2022.”

International Business

Sales internationally soared about 76% from the year-ago-quarter. The segment was hit hard last year by strict lockdowns in the U.K. Walgreens said its new pharmaceutical wholesale joint venture with McKesson Corp. in Germany also contributed to the improved results.

However, these numbers were slightly lower than analysts expected. Brewer said the recovery in the U.K. and other regions where Walgreens operates has been slower. The European recovery poses a question mark for the company, Tanquilut said.

Meanwhile, the U.S. rebound has hit health-care companies faster than expected thanks to the accelerated vaccination timeline, he said. Walgreens is among the earliest of major health-care companies to report this quarter.

Sales at Walgreens’ U.S. stores rose about 5% from the year-ago period as people came for Covid-19 shots and states loosened virus-related restrictions. Prescriptions filled in the quarter jumped about 10%. That figure includes vaccines, in addition to pills and other medications Walgreens dispenses.

Investors aren’t willing to pay for a vaccine story, said Gill, the JPMorgan analyst. People may need booster shots at some point, though it’s not yet clear if and when.

“It may very well be replicable in future quarters, years, et cetera,” she said, “but maybe not.”

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