It has been almost a year since I looked at Walgreens Boots Alliance, Inc. (WBA, Financial) in depth. In that time, the stock is higher by almost 30%, outdistancing even the 27% return of the S&P 500 index. Has the easy money been made, or is Walgreens still a buy? Let’s look at the company’s most recent quarter to answer that question.
Earnings highlights
Walgreens announced its fourth-quarter and fiscal year 2021 results on Oct 14. For the quarter, revenue fell 1.4% to $34.3 billion, but was $869 million higher than Wall Street analysts had expected. Adjusted earnings per share of $1.17 was a 29.5% improvement from the prior year.
Adjusting for divestures, including the $6.5 billion sale of the Retail Pharmacy International’s European business segment to AmerisourceBergen (ABC, Financial), revenue grew 12.8%, or 11.8% in constant currency, for the quarter. Revenue from continuing operations grew 8.6%, or 7.5% in constant currency, to $132.5 billion for the fiscal year. Adjusted earnings per share of $5.31 was a 11.9% increase from the prior year.
For the quarter, U.S. sales grew 6.6% to $28.8 billion. Comparable pharmacy sales accelerated in the fourth-quarter, showing growth of 8.9% year-over-year. For the fiscal year, comparable sales were up 6.7%. Prescriptions grew 8.8%, higher than the full year growth rate of 5%.
U.S. retail sales fell 0.4% for the year, but the fourth-quarter saw a 6.5% increase. Comparable retail sales were higher by 6.2% for the quarter and 1.2% for the year. All categories saw gains, but health and wellness was the primary catalyst for growth. This category was up 14% due to a combination of over-the-counter Covid-19 tests, a late cold and cough season and vitamins. Beauty sales were up nearly 13% as cosmetics performed well. Baby formula demand led to a 4.3% increase in personal care. Transactions rose nearly 7%.
International sales grew 52.6% to $5.5 billion, mostly in response to the company’s German wholesale joint venture, but also because of the ongoing recovery from the pandemic. The UK lifted restrictions on businesses in mid-July. Boots.com sales have doubled since before the pandemic and Boots holds more than 40% market share in the beauty category.
As with the U.S. business, comparable retail and pharmacy sales for Boots UK were much stronger in the quarter than for the year. Retail was higher by 15% for the quarter against an increase of just 0.9% for the year while pharmacy improved 11.4% for the quarter and 5.2% for the year. Store traffic improved 35%, but still remains sharply below pre-pandemic levels.
According to analysts surveyed by Yahoo Finance, Walgreens is expected to earn $5.00 per share in fiscal year 2022, which would be a 5.8% decline from last year.
Takeaways and total return analysis
Covid-19 vaccines were a significant tailwind in the fourth-quarter as Walgreens administered 13.5 million vaccinations during this period. This was approximately 21% of the total number of vaccines administered in the U.S. This helped drive a 485 basis point improvement in comparable prescriptions.
Store traffic continues to improve. The number of visits in the U.S. was up mid-single-digits, aided no doubt by 3.3 million same-day digital orders. UK foot traffic was up sharply as well. Even though its down from pre-Covid levels, this was an improvement from the 45% decline in the third-quarter of fiscal year 2021.
Digital continues to represent an area of real growth potential as this channel had an 82% increase in sales. Digital sales only made up 5% or so of retail sales during the quarter, but this is twice what the company saw two years ago. The number of myWalgreens members grew 13% sequentially to nearly 85 million members. The ability to personalize product offerings to these customers added 40 basis points to quarterly retail sales. Turning to international markets, Boots.com slowed sequentially as more consumers were able to visit stores, but this channel grew 54% for the full year.
Walgreens’ investment in Village Medical remains another area where the company can benefit from its investment. There were 52 VillageMD locations in four markets providing primary and pharmacy services at quarter’s end. The company expects to have more than 80 such locations by the end of 2021.
In addition, leadership announced that it was investing another $5.2 billion in VillageMD, more than doubling its stake to 63% in the company. The additional investment will help in the opening of at least 600 VillageMD at Walgreens primary care practices covering 30 U.S. markets by 2025. Looking out even further, VillageMD has a goal of 1,000 locations by 2027. More than half of these locations will be in underserved locations, bringing services to customers who may not come into contact very often with healthcare and pharmacy services. This could work to enlarge Walgreens’ potential customer pool.
When I looked at Walgreens at the end of the last fiscal year, the stock was trading with a price-earnings ratio below 8. Using the current share price of $49 and expected earnings per share for the year, Walgreens trades with a forward price-earnings ratio of 9.8. According to Value Line, the stock has five- and 10-year average price-earnings ratios of 13.4 and 15.3, respectively.
I continue to believe a multiple of 10 to 12 times earnings remains a conservative and reasonable target valuation for Walgreens given the strength of its current and future business. Applying this valuation range by estimates for the new fiscal year results in a price target of $50 to $60. Reaching the high end of this target would result in a 22.4% gain from current prices.
Total returns would also include the company’s dividend, which has been increased for 46 consecutive years. Walgreens’ yields 3.9% at the moment. Adding the dividend yield to the possible share price appreciation results in a total potential return that could approach the mid-20% range.
Given the solid business performance, yield and low valuation, I continue to find shares of Walgreens an attractive total return and income play even after the 30% return over the last year.
