Walgreens Boots Alliance (WBA 3.69%) came out with fiscal first-quarter results on Thursday, Jan. 6, with the kind of numbers that would typically excite investors. But the stock price action on the day may have left some wondering if there is more going on than what meets the eye.
By the end of the day the stock price had dropped 2.8%, closing at $52.44. So, after a seemingly healthy first quarter and a continued increase in the number of omicron cases leading to more foot traffic, is Walgreens a buy? Let's look at the numbers.
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Earnings and revenue beat consensus estimates
Driven by higher foot traffic related to the COVID-19 pandemic, Walgreens produced first-quarter results that outshined Wall Street estimates on revenue and earnings. Revenue came in at $33.9 billion, topping estimates by 2.8%, or $1 billion. The higher-than-expected revenue helped lead to a 26% beat on earnings, resulting in $1.68 per share. And the company closed out the first quarter with net income of $4.13 per share, crushing the loss of $0.36 per share it experienced during the same period last year.
The company's CFO, James Kehoe, attributed the higher-than-expected numbers to customer visits for COVID-19 vaccines and tests. This included the sales of at-home test kits, an increase in booster shots -- reaching 9 million -- and first-time vaccinations for children. Flu vaccinations also gained attention. With COVID-19 vaccinations as a force driving people to protect themselves this winter season, flu shots skyrocketed by 150% in its international segment for the quarter on a year-over-year comparison.
A same-store sales boost may be short-lived
The increase in pharmacy foot traffic for COVID-19-related items gave same-store sales the largest quarterly boost on a year-over-year comparison in 20 years -- 10.6%. Sales of discretionary products such as toiletries or beauty products grew 16% year over year in the recent quarter. Items that might have been on a person's list for the next grocery store visit are instead being picked up while they're at Walgreens, for convenience. When the need for a Walgreens visit diminishes, so too could those convenience purchases. There could also be a likelihood for a decline in cough and cold medicine sales -- think DayQuil/NyQuil -- down the road. Those sales have picked up due in part to use as treatment for cold-like symptoms related to the omicron variant.
Walgreen's business is certainly benefiting from what's good for the people right now -- vaccinations and testing. This could result in a negative effect long-term if and when we get COVID-19 under control. This is important for investors to keep in mind, because without increased foot traffic, same-store sales could likely go lower, or at the very least, be set against difficult annual comparisons next year.
A reduction in COVID-19-related sales is not the only area that the company needs to worry about. Due to the pandemic and its strain on pharmacy personnel, the company expects to incur $120 million in new labor costs associated with wage increases for pharmacy staff, who have been hammered with prescription refill orders and the work of administering vaccines.
An optimistic outlook leads to raised full-year guidance
Nonetheless, Walgreens is raising its full-year guidance for earnings-per-share growth to come in at low single digits, compared to previous flat guidance. Raised guidance is partly based on the encouraging first-quarter results continuing into the second quarter, combined with the company's revised projection that it will provide 30 million vaccinations for the year (five million more than previous guidance).
Kehoe also points toward continued growth in same-store sales as we move into the second quarter, noting that U.S. sales are tracking two percentage points higher than previously guided, and the international segment is higher by 9% to 11% than previous expectations, led by market growth in Germany.
Same-store sales growth and an increased amount of foot traffic should continue to propel Walgreens revenue higher in the first half of 2022. Beyond that, the company is looking toward expansion of its primary care clinic footprint to drive bigger gains. It currently has 257 VillageMD clinics, acquired in a $5.2 billion purchase in October, of which 81 are co-located at Walgreens stores. It's averaging a new opening every four to five days, with a goal of hitting 160 co-located clinics by the end of this year.
The first quarter was the first during which VillageMD sales hit the books for Walgreens. In only six days, VillageMD was responsible for $26 million in sales and incurred an operating loss of $3 million. Its Walgreens Health corners are also ramping up, with 47 currently open and another 53 expected to open by the end of the year.
A blurry long-term picture
For the next six to 12 months, Walgreens will likely make some investors very happy with its gains. But the long-term picture is not quite as clear. The COVID-19 pandemic-driven business growth will likely eventually fade. Although the company can boast Dividend Aristocrat status and pays a decent 3.5% dividend yield, there are plenty of companies driving the technologies of tomorrow with solid fundamentals and innovative products that I'd rather invest my money in for the long haul.
