Walgreens Boots Alliance, Inc. (WBA - Analyst Report) reported adjusted earnings per share (EPS) of 88 cents in the fourth quarter of fiscal 2015, up 14.3% from the year-ago adjusted number. The adjusted figure also beat the Zacks Consensus Estimate by a solid 8.6%.

On a reported basis, net earnings came in at $26 million or 2 cents per share, a significant improvement from the year-ago net loss of $221 million or loss of 23 cents per share, respectively. A year-over-year double-digit increase in revenues primarily resulted in the bottom-line improvement.

For fiscal 2015, Walgreens Boots reported adjusted EPS of $3.88, which exceeded the Zacks Consensus Estimate by 2.4%. The full-year EPS figure also outweighed the year-ago equivalent figure by 18.3%.

Walgreens Company (WBA - Analyst Report) - Earnings Surprise | FindTheCompany

Interestingly, only a day before its fourth quarter earnings release, Walgreens Boots announced that it has agreed to acquire U.S.-based retail pharmacy chain – Rite Aid Corporation (RAD - Analyst Report), for a total enterprise value of $17.2 billion, including acquired net debt. The transaction is expected to close in the second half of calendar year 2016.

Walgreens Boots expects this transaction to be accretive to its adjusted EPS in its first full year after completion. Additionally, the company expects to realize synergies in excess of $1 billion.

Total Sales

Walgreens Boots recorded total sales of $28.5 billion in the fourth quarter, up 50% year over year primarily due to the inclusion of Alliance Boots’ consolidated results. However, the top line missed the Zacks Consensus Estimate of $28.9 billion.

For fiscal 2015, Walgreens Boots’ total sales grossed $103.4 billion, reflecting a year-over-year improvement of 35.4%. However, the full-year top line figure also missed the Zacks Consensus Estimate of $103.8 billion.

Segments in Detail

Walgreens Boots currently reports under three operating segments: Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale.

The Retail Pharmacy USA division delivered sales of $19.9 billion in the fourth quarter, reflecting an increase of 4.7% from the year-ago period. Within this segment, while total sales in comparable drugstores increased 6.5%, retail comparable store sales were up 0.4% year over year owing to an increase in basket size partially offset by lower customer traffic.

Pharmacy sales, which accounted for 67.4% of the division’s sales in the quarter, increased 6.6% from the year-ago quarter, while pharmacy sales in comparable stores climbed 10%.

The Retail Pharmacy International division delivered sales of $3.5 billion. On a constant exchange rate (CER) basis, comparable store sales in the fourth quarter increased 4.3% compared with the same period a year ago.

The Pharmaceutical Wholesale division recorded quarterly sales of $5.8 billion, up 5% year over year, at CER.

Margins

Gross profit increased 36.4% year over year to $7.27 billion. However, as expected, adjusted gross margin contracted 250 basis points (bps) to 25.5%.

Adjusted selling, general and administrative (SG&A) expenses scaled up 38.6% to $5.92 billion. Adjusted operating income increased 27.5% to $1.3 billion.  However, adjusted operating margin contracted 80 bps to 4.7%.

Store Count

As of Aug 31, 2015, Walgreens Boots’ Retail Pharmacy USA division operated 8,173 drugstores across all 50 states, the District of Columbia, Puerto Rico and the US Virgin Islands – indicating a decline of 34% from the year-ago quarter’s number. The Retail Pharmacy International division operated 4,582 pharmacy-led health and beauty retail stores in eight countries – indicating a net increase of 20 stores since Dec 31, 2014.

Financial Condition

Walgreens Boots exited the reported quarter with cash and cash equivalents of $3 billion, down from $4.45 billion in the third quarter of fiscal 2015. Long-term debt was $13.3 billion, compared with $15.1 billion in the prior quarter.

Moreover, the company generated operating cash flow of $5.7 billion in fiscal 2015 compared with $3.89 billion in fiscal 2014. The resultant free cash flow was $4.41 billion.

Guidance

Walgreens Boots updated its EPS guidance for fiscal 2016. The company currently expects to earn adjusted EPS in the $4.25–$4.55 range in fiscal 2016, narrower than the earlier guided range of $4.25–$4.60. The Zacks Consensus Estimate for fiscal 2016 earnings is pegged at $4.53, within the company’s guidance range.

This guidance assumes no material accretion from the agreement to acquire Rite Aid, but reflects an adverse impact on adjusted EPS due to the suspension of the balance of the company's $3 billion share repurchase program to partly fund the transaction.

Restructuring Initiative

During the second quarter of fiscal 2015, Walgreens Boots had announced a $1.5 billion cost savings program to remain in effect through fiscal 2017. In the quarter under review, the company has made good progress with the program and has achieved more than half of the program’s expected savings as of the end of fiscal 2015.

In the Retail Pharmacy USA division, this effort included: closing 75 stores in the quarter for a total of 84 store closings in fiscal 2015, as part of a plan to close approximately 200 stores; reorganizing divisional and field operations; driving operating efficiencies; and streamlining information technology and other functions. Owing to these actions, the company incurred pre-tax charges of $382 million.

Our Take

Walgreens Boots reported a mixed fourth-quarter fiscal 2015 with earnings comfortably beating the Zacks Consensus Estimate, while the top line missed the mark. We note that the results echo the trend exhibited by the company in the preceding quarter. On a brighter note, the company made substantial progress in its strategic cost reduction initiative as is evident from the accelerated rate of store closure during the reported quarter.

Meanwhile, generic inflation in the pharmaceutical industry continued to have an adverse effect on Walgreens Boots’ store pharmacy sales, as is evident from the 250 basis point contraction observed in the company's gross margin in the reported quarter.

Nevertheless, the synergies from the Walgreen Co. and Alliance Boots merger continue to boost our confidence in the stock. Combined net synergies as of fiscal 2015 were $799 million and the company is well on track to reach at least $1 billion in synergies in fiscal 2016.

 Zacks Rank

Walgreens Boots currently has a Zacks Rank #2 (Buy). Some other top-ranked medical product stocks are Hill-Rom Holdings, Inc. (HRC - Analyst Report), SurModics, Inc. (SRDX - Analyst Report) and NuVasive, Inc. (NUVA - Analyst Report). While Hill-Rom Holdings and Surmodics sport a Zacks Rank #1 (Strong Buy), NuVasive holds a Zacks Rank #2.

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