About That Walgreens Acquisition


When I initiated coverage on Walgreens Boots Alliance (NASDAQ:WBA), I told you that this was the one big pharmacy play I had yet to cover. Of course, I routinely cover competitors Rite-Aid (NYSE:RAD) and CVS Health (NYSE:CVS) in great detail. But the thing about Walgreens Boots Alliance, which has now consumed Rite-Aid of course, is that this company is the first global pharmacy-led, health and wellbeing enterprise in the world. However, what I discussed WBA’s results earlier this week I said article was that we simply do not know how accretive the deal will be. While the Rite-Aid acquisition was approved by shareholders, there is no real guidance on the impact of the buyout. This led to many comments on this issue. And the truth is I simply do not know the impact. My inclination is that like any other major merger, at first the deal will be costly as the processes are integrated, stores are closed, employees moved etc. Then, say a year or so later, things will be accretive. But of course, Rite-Aid’s operations need to be earnings/cash flow positive to be accretive. So on that note I want to discuss the just reported results out of Rite-Aid.

Well in Q4 the company saw revenues of $8.27 billion which missed estimates by $130 million. Now, despite the sales miss there was a beat earnings by $0.01. Net income came in at $65.6 million, or $0.06 per diluted share. On and adjusted basis, adjusted net income was $76.1 million, or $0.07 per share while adjusted EBITDA was $383.0 million, or 4.6% of revenues. These headline numbers were strong but we need to dig a little deeper.


But we need to dig a little deeper. I think the market continues to discountsales growth. Revenues for the quarter were of course as I said $8.3 billion versus revenues of $6.8 billion in the prior year’s fourth quarter, an increase of $1.5 billion or 20.8%. Now some of this growth was from the purchase of EnvisionRX. But let’s look at the key metrics regarding sales.

Retail Pharmacy Segment revenues were $6.8 billion and increased 0.3% primarily as a result of a slight decrease in same store sales. Pharmacy Services Segment revenues were $1.5 billion. Same store sales decreased 0.6% year-over-year, consisting of a 0.4% increase in front-end sales and a 0.8% decrease in pharmacy sales. Pharmacy sales included an approximate 241 basis point negative impact from new generic introductions. The number of prescriptions filled in same stores increased 0.1% over the prior year period. Prescription sales accounted for 68.1% of total drugstore sales.




One critical item to recall is the effective management here. Despite the pending merger with Walgreens, the company continues to effectively manage its properties. In the quarter, the company relocated 10 stores, opened 3 new stores, remodeled 89 stores and expanded 1 store, bringing the total number of wellness stores chain-wide to 2,042. The company also closed 4 stores, resulting in a total store count of 4,561 to start Q1. There are less stores now than what the company had two years ago, yet sales are much higher.

Now that Rite-Aid finally completed its acquisition of EnvisionRx sales are up nicely. It is interesting now that Rite-Aid will merge with Walgreen’s Boots, but the key sticking point is whether or not the deal is accretive. Given the results posted by Rite-Aid, it is tough to say it will not be. As I alluded to earlier the expenses are high when integrating the operations of a company the size of Rite-Aid, so it is likely the first few quarters will be weighed by such expenses post-merger. However, Rite-Aid was on the path of competitor CVS Health. Walgreen’s Boots made a smart move to scoop up Rite-Aid as the company has been undergoing a transformation into a retail healthcare company. Rite-Aid had been expanding beyond simply offering up medications and having a small retail front. Now it is being consumed by a premier wellness company and I will be watching closely for company analyses out of Walgreens Boots that suggest when the deal to pick up Rite-Aid will feed the bottom line.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit «follow.» He also writes a lot of «breaking» articles, which are time sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for «Real-time alerts on this author» under «Follow.»

Source: Seeking Alpha

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