Why Walgreens’ Earnings Plunged in Q3

Walgreens Boots Alliance (NASDAQ:WBA) beat Wall Street’s estimates with the fiscal 2020 second-quarter results it reported in April. However, the pharmacy giant warned at the time that the COVID-19 pandemic could impact its performance during the rest of the year.

That warning turned out to be on target. Walgreens announced its fiscal third-quarter results before the market opened on Thursday, and they were disappointing. Here are the highlights from the update.

Image source: Getty Images.

By the numbers

For the quarter that ended May 31, Walgreens revenue was $34.63 billion, a minuscule 0.1% increase from the $34.59 billion reported in the same quarter of the previous year. However, that still narrowly beat analysts’ average revenue estimate of $34.35 billion.

The company reported a GAAP net loss in fiscal Q3 of $1.7 billion, or $1.95 per share. This reflected significant deterioration from its net income of $1 billion, or $1.13 per share, in the prior-year period. 

On a non-GAAP (adjusted) basis, Walgreens’ net income in the quarter totaled $723 million, or $0.83 per share. This was much lower than the company’s adjusted net income of $1.3 billion, or $1.47 per share, in fiscal 2019 Q3. It also fell far short of Wall Street’s consensus earnings estimate of $1.17 per share.

Behind the numbers

The COVID-19 pandemic wreaked havoc on Walgreens during its fiscal 2020 third quarter. Management estimated that the crisis sapped between $700 million and $750 million from its sales.

This impact was especially hard in the company’s international operations. Walgreens stated that the U.K. market was the most affected by the COVID-19 pandemic. The company wrote off $2 billion in non-cash impairment charges for its Boots UK business. These charges were the primary factor in Walgreens’ big GAAP net loss in Q3.

There was one somewhat brighter spot. Walgreens’ retail pharmacy USA sales rose 3.2% in the quarter to $27.4 billion. This growth was driven by higher brand-drug prices and a strong 15.9% increase in specialty drug sales. However, prescription volumes in fiscal Q3 increased more slowly than in the previous quarter due to a decline in physician visits and hospital admissions amid the COVID-19 pandemic.

Also, the company’s pharmaceutical wholesale revenue rose 5.3% year over year in the quarter on a constant-currency basis. The bad news, though, was that currency fluctuations acted as a headwind, causing reported growth for the unit to be only 0.6%.

Looking ahead

Walgreens Boots Alliance now expects fiscal 2020 adjusted earnings per share of between $4.65 and $4.75. This range includes estimated COVID-19 impacts of between $1.03 and $1.14 per share. The company said…