Analysis: Walgreens ends year on mixed note
Walgreens has ended its fiscal year with a mixed set of numbers. Overall, sales rose by 5.3%, thanks to a robust performance from the U.S. pharmacy division, which continues to be boosted by the AllianceRx Walgreens Prime initiative. However, away from pharmacy, performance is much weaker with international sales, retail revenue, and the bottom line all looking decidedly soft.
International, where revenue fell by 3.2%, is partly explainable by the unfavorable exchange rate. However, even when this is accounted for, the division's sales were down by 0.4%. In our view, this underlines the challenges in some of the more mature markets, like the U.K., where competition is tougher and growth more difficult to attain.
For the full year, international sales fell by almost 11%. This unhelpful hole in Walgreens' revenue line was plugged by a better performance from the U.S. division, where full-year sales increased by around 4%. Even so, the net impact has been to bring Walgreens down from its traditionally high growth trajectory to a much shallower pace of advance.
Fortunately, sales growth will pick up the pace in the year ahead, mostly thanks to the purchase of 1,932 stores from Rite Aid for $4.375 billion. None of these store additions are included in the fourth quarter results as the first handful of shops were only integrated last week. The amalgamation process will continue until spring 2018 when all stores should have been brought into the Walgreens fold.
As much as the new stores will provide a boost to revenue, they also come with a cost attached. Walgreens has earmarked around $1.25 billion for the integration process, which includes capital expenditure on refurbishments and various administrative charges; these will be spread over a three-year period. Some of the costs will be offset by $300 million of synergy savings, and we believe Walgreens will be able to boost store productivity and margins thereby giving further buoyancy to the bottom line. Even so, we believe this is an acquisition that will take some time before it turns a genuine profit.
An enlarged fleet brings with it the question of optimization. In this regard, we are encouraged by Walgreens review of its store operations. Although we do not expect there will be many closures, we do expect the company will find some duplications and will be quick to extract the resultant cost savings.
The acquisition of Rite Aid stores has given Walgreens a strategic play for the next year or so. However, it does not mean that the company can neglect the day-to-day running of the business. Here we believe much more effort is needed on the retail side where results remain anemic with total sales down by 3.9% and comparable sales reduced by 2.1% in the fourth quarter.
Admittedly some of the softness in retail is the result of pulling back from various e-commerce operations. Even so, it suggests that store performance is still below par -- especially in basic personal care and household essentials. Here, Walgreens fails to encourage browsing and has more work to do in remaining front-of-mind for such categories.
International, where revenue fell by 3.2%, is partly explainable by the unfavorable exchange rate. However, even when this is accounted for, the division's sales were down by 0.4%. In our view, this underlines the challenges in some of the more mature markets, like the U.K., where competition is tougher and growth more difficult to attain.
For the full year, international sales fell by almost 11%. This unhelpful hole in Walgreens' revenue line was plugged by a better performance from the U.S. division, where full-year sales increased by around 4%. Even so, the net impact has been to bring Walgreens down from its traditionally high growth trajectory to a much shallower pace of advance.
Fortunately, sales growth will pick up the pace in the year ahead, mostly thanks to the purchase of 1,932 stores from Rite Aid for $4.375 billion. None of these store additions are included in the fourth quarter results as the first handful of shops were only integrated last week. The amalgamation process will continue until spring 2018 when all stores should have been brought into the Walgreens fold.
As much as the new stores will provide a boost to revenue, they also come with a cost attached. Walgreens has earmarked around $1.25 billion for the integration process, which includes capital expenditure on refurbishments and various administrative charges; these will be spread over a three-year period. Some of the costs will be offset by $300 million of synergy savings, and we believe Walgreens will be able to boost store productivity and margins thereby giving further buoyancy to the bottom line. Even so, we believe this is an acquisition that will take some time before it turns a genuine profit.
An enlarged fleet brings with it the question of optimization. In this regard, we are encouraged by Walgreens review of its store operations. Although we do not expect there will be many closures, we do expect the company will find some duplications and will be quick to extract the resultant cost savings.
The acquisition of Rite Aid stores has given Walgreens a strategic play for the next year or so. However, it does not mean that the company can neglect the day-to-day running of the business. Here we believe much more effort is needed on the retail side where results remain anemic with total sales down by 3.9% and comparable sales reduced by 2.1% in the fourth quarter.
Admittedly some of the softness in retail is the result of pulling back from various e-commerce operations. Even so, it suggests that store performance is still below par -- especially in basic personal care and household essentials. Here, Walgreens fails to encourage browsing and has more work to do in remaining front-of-mind for such categories.