Walgreens' 4th Quarter Shows Positive Signs

The company has several areas of strength, and shares remain significantly undervalued

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Oct 15, 2020
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Earlier this month, I wrote that I felt Walgreens Boots Alliance (

WBA, Financial) was a dividend growth investor's dream stock. I continue to believe this to be true because the company rates highly in terms of profitability, capital returns, dividend yield and track record.

The stock has struggled this year, dropping almost 38% year-to-date as the Covid-19 pandemic has greatly impacted results.

However, the company's fortunes may be changing. Walgreens reported earnings results that topped Wall Street's estimates on Thursday morning. Let's look at why the recent business performance confirms my bullish stance on the stock.

Quarterly highlights

Walgreens reported its fourth quarter and full fiscal year 2020 results on Oct. 15. Revenue increased 2.4% year over year to $34.8 billion, coming in $390 million higher than expected. Adjusted earnings per share decreased 41 cents, or 29%, to $1.02. This was 6 cents ahead of estimates.

As with the previous quarter, the pandemic materially impacted the company's bottom-line. Covid-19 related costs reduced EPS results by 46 cents.

For the fiscal year, revenue increased 2% (2.3% in constant currency) to $139.5 billion. Adjusted EPS decreased 21% to $4.74. Covid-19 related costs lowered EPS results by an estimated $1.06.

Retail Pharmacy USA sales improved almost 4% to $27 billion. Higher retail sales and prescription volumes more than offset store closures that Walgreens had previously announced. Same-store sales were up 3.6%.

Walgreens' prescriptions filled was higher by 1.6% overall, with same-store growth of 3.6%. Same-store prescriptions accelerated from the third quarter where growth was 3.2%. Same-store pharmacy sales improved more than 3%. Walgreens' retail prescription market share declined 30 basis points to 20.7%, which was attributed to store closures.

Retail sales were up 1.5% with comparable sales climbing nearly 5%. Removing tobacco and e-cigarettes, comparable sales climbed 6.5%. While traffic was down across the company, basket size was up high double-digits.

This segment benefited from 15% growth in health and wellness and an 8% increase in personal wellness. The demand for personal protection equipment was the primary driver of growth in this segment. Beauty (down 3%) and photo (lower by 4%) were headwinds to results.

The company's digital efforts paid off in the quarter as Walgreens.com had 39% growth in sales and home delivery was up approximately six times as much as the previous year.

Retail Pharmacy International declined 15% to $2.3 billion. Currency exchange was a 0.5% benefit to results.

Boots UK experienced a nearly 17% drop in sales and comparable sales were lower by 29.2%. Traffic did improve compared to the third quarter of the fiscal year, but was still down significantly. On the plus side, the segment's online business was higher by 155%. I believe that this means that products and services remain in high demand.

Revenue for Pharmaceutical Wholesale increased more than 4% to $6 billion. This segment saw higher demand from key European markets such as Germany and France as well as emerging markets.

Despite a 2% decrease in cash provided by operating activities, the company's free cash flowed was higher by almost 6% to $4.1 billion.

Walgreens also provided some fiscal year 2021 guidance. The company expects EPS to return to growth at a low single-digit rate.

In the context of the global pandemic, I think Walgreens performed quite well in the fourth quarter and fiscal year. Covid-19 related costs were a major headwind, but revenue was up slightly year-over-year. The decline in foot traffic wasn't unexpected, but the increase in basket size and gains made in e-commerce show that Walgreens' products and services are still in demand among consumers.

Final thoughts

The market seems to be positive on results, as shares of Walgreens are higher by more than 3% while the S&P 500 is down 1% for the day as of the writing of this article.

Assuming that Walgreens can grow the bottom-line by a rate of 2% in fiscal year 2021, which would be in-line with the company's guidance, then EPS for next year could be as high as $4.83. With shares currently trading at $36.83, Walgreens has a forward price-earnings ratio of 7.6 based on this estimate.

I maintain my valuation target range of 10 to 12 times earnings, which is above this forward price-earnings ratio. Reaching the low end of this range would result in a 31% return, not including the dividend.

The GuruFocus Value chart seems to agree with my assessment of Walgreens' valuation, rating the stock as "significantly undervalued."


As stated in my previous article on the company, Walgreens has 45 consecutive years of dividend growth and yields more than 5% today. This is significantly higher than the 10-year average yield of 2.2%.

I continue to see Walgreens as one of the best investments in the market for those who consider themselves a value and/or income investor.

Author disclosure: the author has no position in any stock mentioned in this article.

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