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Walgreens posts 5.9% lift in Q3 sales; considering second step of Alliance Boots transaction

BY Michael Johnsen

DEERFIELD, Ill. — As Walgreens carefully considers how to best execute the second step of its acquisition of Alliance Boots, Walgreens on Tuesday relayed its progress in improving its domestic business, including the company’s success in winning the prescription business of high-value seniors and the pending national launch of its Boots No7 beauty brand.

"To drive our [pharmacy] performance we’ve been making deliberate, strategic decisions to win with high-value seniors," Greg Wasson, Walgreens president and CEO, told analysts Tuesday morning. Walgreens targets baby boomers through preferred relationships with Medicare Part D plans, by growing 90-day at retail and by expanding vaccines and other preventative care services, Wasson said. "These decisions continue to drive growth in the quarter, contributing to strong top-line growth," he said. Walgreens recorded an 11.6% increase in Medicare Part D prescriptions in the third quarter as compared to the comparable year-ago period. "Part D marketshare increased 60 basis points this May, compared to the same month last year, and overall 90-day volume was up 15%," Wasson added. 

Across the front-end, Walgreens is preparing to launch its Boots No7 brand nationwide after successful introductions in the Phoenix and New York markets. "To further engage our beauty customers, we extended the reach of Boots brands," Wasson said. "In New York, one of the country’s most important beauty markets, we currently have Boots brands in more than 125 Walgreens and Duane Reade stores, with a goal of 183," he said. "From New York we will begin our launch across the United States." 

That iconic brand launch will augment the improved beauty experience Walgreens has realized. "As we prepare for that expansion, results are coming in from Phoenix, our most mature market for Boots No7, and it’s clear our new beauty experience is elevating our performance," Wasson said. "Boots No7 is the No. 1 skin care brand sold in all of our Phoenix stores. And baskets with Boots items are bigger than the average beauty basket. In addition, 80% of our beauty customers tell us their beauty experience is improving." Boots No7 is also the best-selling beauty brand on Walgreens.com. 

Walgreens on Tuesday posted $19.4 billion in sales, up 5.9%, for the third quarter ended May 31. Sales for the first nine months increased 5.6% to $57.3 billion. 

“We continued to see improving top-line growth in the third quarter driven by increased daily living sales and strong increases in both prescriptions filled and our pharmacy market share,” stated Wasson. “At the same time, we are experiencing increased pressure on pharmacy gross profit margins. We maintained solid expense control in the third quarter to offset some of this pressure while understanding that there is more to be done. We will be accelerating our optimization efforts, including taking additional steps to lower expenses companywide," he said. "In addition, our joint venture with Alliance Boots continues to generate significant benefits.”

Front-end comparable store sales increased 2.2% in the third quarter, customer traffic in comparable stores decreased 0.7% and basket size increased 2.9%, while total sales in comparable stores increased 4.8%. 

Prescription sales, which accounted for 64.4% of sales in the quarter, increased 8.4%, while prescription sales in comparable stores increased 6.3%. The company filled 218 million prescriptions in the quarter, an increase of 4.5% over last year’s third quarter. Prescriptions filled in comparable stores increased 4.1% in the quarter. As of May 31, Walgreens increased its retail prescription market share 20 basis points from a year ago to 19% as reported by IMS Health on a 30-day adjusted basis.

Walgreens also saw strong growth in prescriptions filled for Medicare Part D patients, which increased 11.6% in the third quarter compared with last year’s quarter, while the company’s Part D market share increased 60 basis points in May compared with the same month a year ago.

Walgreens Balance Rewards loyalty program reached 81 million active members at the end of this year’s third quarter.

The combined synergies for Walgreens and its strategic partner, Alliance Boots, in the first nine months of fiscal 2014 were approximately $367 million. The joint synergy program is now estimated to deliver second-year combined synergies of $400-$450 million, an increase from the previous second-year estimate of $375-$425 million. Alliance Boots contributed 15 cents per diluted share to Walgreens third quarter 2014 adjusted results. The company estimates that the accretion from Alliance Boots in the fourth quarter of fiscal 2014 will be an adjusted 6 to 7 cents per diluted share. This estimate does not include amortization expense, the impact of AmerisourceBergen warrants or one-time transaction costs, and reflects the company’s current estimates of IFRS to GAAP conversion and foreign exchange rates.

Walgreens board of directors is moving forward toward consideration of the second step in the Walgreens-Alliance Boots strategic transaction, including determination of timing and structure, combined management teams, cost reduction initiatives and potential changes in the company’s future capital structure.

“[Executive chairman of Alliance Boots] Stefano Pessina and I are working hard to realize our joint vision for exercising step two of the Walgreens-Alliance Boots strategic transaction for consideration by the Walgreens board of directors,” Wasson said. “We are working through complex issues in planning for step two, and we are taking the appropriate time to come to the right resolution for the combined enterprise.”

As a result of the many step two considerations and current business performance, the company is withdrawing its fiscal year 2016 goals that were previously announced in 2012. Specifically, once key decisions have been made on the above matters, Walgreens anticipates being in a position to hold an investor call, which is expected to occur by late July or early August. At that time, the company expects to provide a new set of goals and metrics for the proposed combined enterprise for fiscal year 2016.

Net earnings totaled $722 million, representing a 15.7% increase from the same quarter a year ago. This year’s third quarter earnings benefited from a lower GAAP effective income tax rate. Adjusted fiscal 2014 third quarter net earnings were $883 million, an 8.7% increase from $812 million in the same quarter a year ago. This year’s adjusted third quarter earnings also benefited from a lower effective income tax rate. Adjusted net earnings per diluted share for the quarter increased 7.1% to 91 cents, compared with 85 cents per diluted share in the year-ago quarter.

GAAP total gross profit dollars increased $218 million, or 4.2%, compared with the year-ago third quarter, with gross profit margins decreasing 40 basis points versus the year-ago quarter to 28.1 as a percentage of sales. Adjusted gross profit dollars increased $139 million, or 2.6%, compared with the year-ago third quarter.

Pharmacy gross profit dollars were negatively impacted by lower third-party reimbursement, fewer brand-to-generic drug conversions compared with the year-ago quarter, and generic drug price inflation. Both pharmacy and front-end margins benefitted from purchasing synergies from the company’s joint venture with Alliance Boots. The LIFO provision was $41 million in this year’s third quarter versus $120 million last year.

Walgreens delivered free cash flow of $1 billion in the third quarter and operating cash flow of $1.3 billion in the quarter, as lower inventories drove improvements in working capital. Inventories benefited from the company’s distribution agreement with AmerisourceBergen.

The company opened or acquired 39 new drug stores in the fiscal 2014 third quarter, the same number opened or acquired in the year-ago quarter.

As of May 31, Walgreens operated 8,683 locations. The company has 8,217 drug stores nationwide, 120 more than a year ago. Walgreens also operates worksite health and wellness centers, infusion and respiratory services facilities, specialty pharmacies and mail service facilities. Its Take Care Health Systems subsidiary manages more than 700 in-store convenient care clinics and worksite health and wellness centers. Walgreens e-commerce business includes Walgreens.com, drugstore.com, Beauty.com, SkinStore.com and VisionDirect.com.

 

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Lupin announces launch of generic Cipro

BY Ryan Chavis

MUMBAI & BALTIMORE — Lupin Pharmaceuticals last week announced the launch of ciprofloxacin oral suspension in 5 g/100 mL (250 mg/5 mL) and 10 g/100 mL (500 mg/5 mL) dosage strengths.

The drug is the generic version of Cipro oral suspension from Bayer HealthCare Pharmaceuticals. It’s used for the treatment of infections caused by susceptible isolates of the designated microorganisms in various conditions and patient populations, according to Lupin.

Lupin was first to file an abbreviated new drug application for Cipro and is entitled to 180 days of market exclusivity. Sales for Cipro oral suspension in the United States totalled $8.6 million as of March 2014, according to IMS data.

 

 

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Survey: Online grocery experience has room for improvement

BY Dan Berthiaume

London — Three-quarters of online shoppers have shopped online for groceries and 40% of these do so on a regular basis, but only one-third of grocery shoppers rate their experience as “easy.” And only one-in-five (19%) of those surveyed by EDigitalResearch are delighted with their online grocery experience.

Recent EDigitalResearch online consumer survey results also show that on average, 77% of online grocery shoppers say they take fifteen minutes or more to complete an online grocery shop, with 21% taking more than half an hour. Half of online shoppers feel that an online grocery shop takes too long, and 50% of those surveyed do not rate the time it takes them to complete an online grocery shop as positive.

Saved lists or favorites are the most common way to navigate around a retailers site, with around one third (35%) of those surveyed stating they use these navigational tools most often. However, less than 10% of online grocery shoppers always stick to the same brands. Half (53%) of those surveyed felt that they switch between brands on a regular basis.

And in a positive sign for online grocery promotions, only 10% of online grocery shoppers feel that there is too much advertising going on when they shop online for food and drink items.

 

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