Walgreens' 1Q Exceeds Expectations as it Accelerates Health Care Investments

Walgreens Boots Alliance, Inc. (WBA) reported fiscal 2021 first-quarter sales of $36.3 billion, an increase of 5.7% from the year-ago quarter, as it makes moves to position itself to play a greater role in the delivery of health care with full-service doctors' offices.

For first quarter of fiscal 2021, which ended Nov. 30, 2020, the retailer had an operating loss of $440 million, compared with operating income of $1.0 billion in the same quarter a year ago, entirely due to a $1.5 billion charge from the company's equity earnings in drug wholesale company AmerisourceBergen Corp. Adjusted operating income was $1.3 billion, a decrease of 9.9% from the same quarter a year ago and a decrease of 10.1% on a constant currency basis.

A day before releasing its fiscal 2021 first quarter results, WBA revealed a strategic agreement with Chesterbrook, Pennsylvania-based AmerisourceBergen under which that company will acquire the majority of WBA’s Alliance Healthcare businesses for approximately $6.5 billion, comprising $6.275 billion in cash and 2 million shares of AmerisourceBergen common stock. The transaction will allow WBA to increase its focus on further growing its core retail pharmacy businesses.

“This deal will enable significant value creation for both companies and will generate new synergies in addition to those already captured. It is a logical step following the success of our long-term strategic relationship with AmerisourceBergen, which has been a strong and trusted partner since 2013,” said Executive Vice Chairman and CEO Stefano Pessina. “The transaction will fuel higher future investments to grow and transform our core retail pharmacy and health care businesses, and is EPS accretive long-term for Walgreens Boots Alliance.”

WBA is using proceeds of the divesture to accelerate its investments in Chicago-based VillageMD to support the opening of 600 to 700 Village Medical at Walgreens primary care clinics in more than 30 U.S. markets within the next four years, with the intent to build hundreds more thereafter. Walgreens is the first national pharmacy chain to offer full-service primary care clinics co-located at its stores at a large scale.

In July 2020, Walgreens and VillageMD announced an expansion of their partnership and the intent to open 500 to 700 clinics, supported by WBA’s investment in VillageMD over three years of $1 billion in equity and convertible debt. WBA and VillageMD have now renegotiated the terms of their agreements to enable WBA to accelerate its investment to increase the pace and scale of the rollout of the clinics. As of Jan. 6, WBA’s $750 million investment has been completed.

“Walgreens is focused on creating the pharmacy of the future, providing a broad and meaningful range of high-quality, affordable health care services to our patients and customers,” said Pessina. “Through these conveniently located clinics at our neighborhood stores, we will uniquely integrate the pharmacist as a critical member of VillageMD’s multidisciplinary care team to provide patients with personalized and coordinated care.”

In December 2020, the companies unveiled plans to open 40 full-service primary care clinics in Texas, Arizona and Florida by the end of summer 2021. With many clinics in medically underserved areas, Village Medical at Walgreens can meet the needs of patients who may not have access to health care and are at greater risk of health disparities.

Another strategic priority was rolled out in November when Walgreens introduced its reinvented customer loyalty program. According to the drug store chain, the benefits offered by the new program, myWalgreens, include the fastest same-day retail pickup currently available. Customers can shop online or on a fully redesigned mobile app for health-and-wellness products, and then pick them up at a store, curbside or at a drive-thru in as short a time as 30 minutes. More than 1.7 million pickup orders have been completed since the launch last November.

Other key financial results from WBA’s first quarter include:

• Adjusted net earnings decreased 13.9% to $1.1 billion, down 14.3% on a constant currency basis.
• Adjusted EPS was $1.22, a decrease of 11.2% on a reported basis and a decrease of 11.6% on a constant currency basis, reflecting an estimated adverse COVID-19 impact of 26 cents to 30 cents per share.
• Net cash provided by operating activities was $1.2 billion in the first quarter and free cash flow was $763 million, an increase of 13%.
• Retail Pharmacy USA had first-quarter sales of $27.2 billion, an increase of 3.9%

"Our first-quarter results exceeded expectations as we continue to deliver on our strategic priorities,” noted Pessina. “While the business environment remains challenging, we are rising to the occasion with agility and discipline, and we are confident in our outlook for adjusted EPS for the fiscal year. Our role in the health care system has never been more important, as the communities we serve continue to turn to our trusted brands and expert pharmacists."

While the second quarter is expected to see higher adverse impacts from COVID-19, including the weaker cough, cold and flu season, WBA anticipates first-half fiscal 2021 adjusted EPS to be broadly in line with prior expectations.

Deerfield, Illinois-based Walgreens is included in the Retail Pharmacy USA division of Walgreens Boots Alliance Inc. The drug store chain operates more than 9,000 retail locations across America, Puerto Rico and the U.S. Virgin Islands, serving about 8 million customers daily. Walgreens is No. 4 on The PG 100, Progressive Grocer’s 2020 list of the top food retailers in North America.