Walgreens Q1 preview: Where next for WBA stock?

When will Walgreens release Q1 earnings?

Walgreens Boots Alliance is scheduled to release first quarter earnings covering the three months to the end of November 2021 before markets open on Thursday January 6.

 

Walgreens Q1 earnings preview: what to expect from the results

Walgreens Boots Alliance made a strong finish to the last financial year by beating expectations in the final quarter. The company, which is the largest retail pharmacy in the US and Europe with over 13,000 stores, reported 12.8% sales growth and a 29.5% jump in adjusted EPS in the last quarter as it benefited from looser Covid restrictions and capitalised on traffic from people visiting to get vaccinated or tested, with Walgreens alone having administered over 40 million jabs and 16 million tests since the start of the pandemic.

Wall Street forecasts Walgreens will report a 9.7% decline in first quarter sales to $32.80 billion from the bumper figure of $36.31 billion seen the year before as it comes up against a tough comparative period. However, adjusted EPS is forecast to rise 9.0% to $1.33 from $1.22 thanks to improved profitability.

Attention will be on the outlook for the remainder of the year and whether the spread of Omicron has impacted guidance. The US and most of Europe have so far refrained from reintroducing strict restrictions and it has prompted governments to accelerate their vaccination programmes by administering booster shots while also encouraging a significantly higher rate of testing.

Current guidance is for annual adjusted EPS to come in broadly flat from the $4.91 delivered in the last financial year, as 4% growth from its core operations is offset by investment into its new Walgreens Health unit launched in October. This new unit sits at the heart of its new consumer-centric healthcare strategy and is underpinned by a $5.5 billion investment into VillageMD and CareCentrix.

The bulk of the funds, worth $5.2 billion, is being ploughed into VillageMD so Walgreens can more than double its holding from 30% and take a majority stake of 63%. The company provides value-based primary care and Walgreens plans to add 600 of its sites to its own stores by 2025 and 1,000 by 2027. Meanwhile, $330 million is being spent on a 55% stake in CareCentrix (alongside an option to buy the rest of the business), which provides home care for people that are transitioning from hospital to their home.

Investors will also be keeping an eye on Boots after media reports surfaced in December that Walgreens had lined up advisors to help it sell or spin-off the company. Management have conceded that attention is turning toward the North American healthcare market and Boots did not feature as prominently as some analysts expected when it outlined its new long-term growth strategy back in October. For context, the international business run under the Boots brand delivered just $46 million of operating profit in the last quarter while its core business in the US delivered over $1.0 billion. That has opened the door to the idea that Walgreens could be looking to sell Boots to raise funds that can be invested into its new Health unit. The fact Walgreens delivered its $2 billion annual cost-saving target a year early and said it was now eyeing $3.3 billion of savings is also encouraging that Walgreens can find the cash it needs to become a one-stop shop that can serve more of America’s healthcare needs.

The hope is that the investments it is making now will deliver significantly faster earnings growth over the longer-term, with Walgreens eyeing 4% growth in adjusted EPS in its 2023 and 2024 financial years before accelerating to between 11% to 13% thereafter.

 

Where next for WBA stock?

Walgreens shares currently trade at $53.06, the highest level since June 2021 after rallying over 21% since hitting a 11-month low at the start of December. The fact it has breached through the $52 mark is bullish considering that figure acted as a ceiling on several occasions during the second half of 2021. On the upside, that brings the 15-month high of $57 that was last hit in April 2021 into frame, while $52 may continue to act as a psychological barrier on the downside.

The 21 brokers covering Walgreens currently have a Hold rating on the stock and an average target price of $52.80.

 

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