Walgreens Boots Alliance (WBA +0.00%) reported third-quarter earnings last week, and investors were down on the results. The stock fell to a new 52-week low as the company's sales and profits declined from the previous year. While that isn't great news to hear, there's more to the story. Let's dig in.
NASDAQ: WBA
Key Data Points
Sales were down, but they weren't a disaster
For the period ended May 31, revenue declined 4.2% year over year to $32.6 billion. But a big part of that is due to its pharmacy sales in the U.S., which were down 9.7% during the period. The company's comparable retail revenue in the U.S. rose by 2.4% when excluding tobacco. And internationally, sales grew slightly by 0.3% year over year to $5.3 billion.
Overall, the company's top line was better than the $32.06 billion that analysts were expecting. It was by no means catastrophic, especially given that in prior periods the healthcare company received significant boosts in traffic due to COVID-19 vaccinations. Although it's still administering these shots, Walgreens notes that vaccine volumes hit their peak a year ago.
Profits tanked due to a couple of large items
Investors may have also soured on is the company's net earnings of $229 million, which were a fraction of the nearly $1.2 billion that Walgreens reported a year ago. But as displayed in the chart below, there were two glaring areas responsible for the drop in net income: selling, general and administrative (SG&A) expenses, and equity investments.
Source: Company filings. Chart by author.
A big chunk of the bump in SG&A this past quarter was due to $683 million in expenses that Walgreens incurred in relation to an opioid settlement in Florida.
Meanwhile, earnings from "equity method investments" -- that is, large positions Walgreens has taken in the shares of other companies -- totaled just $5 million this past quarter versus $575 million in the prior-year period. Walgreens also enjoyed a $424 million gain from a partial sale of its investment in AmerisourceBergen.
When stripping out these various non-operating items, which can fluctuate from one period to another, Walgreens' bottom line doesn't look nearly as bad; its adjusted per-share profit of $0.96 was better than the $0.92 Wall Street was expecting.
Another positive takeaway from the company's recent earnings report is an expected improvement in long-term profitability. Through a transformational cost management program, Walgreens expects that by fiscal 2024, it will achieve annual cost savings of $3.5 billion -- higher than the $3.3 billion it was previously forecasting.
Is Walgreens a buy?
The opportunity to buy Walgreens at a new 52-week low is attractive given that the stock now pays a yield of around 5%. That's far better than the S&P 500 average of 1.7%. Shares of the healthcare company are now down 26% this year, performing worse than the broader index, which has fallen by 20%.
Walgreens isn't in such bad shape as the stock's sell-off suggests. The company's fundamentals remain sound -- and it could make for an underrated buy right now.
