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Walgreens Boots Alliance, Inc. (WBA)·Q3 2024 Earnings Summary

Executive Summary

  • Q3 FY24 sales were $36.4B (+2.6% y/y) with GAAP EPS $0.40 and adjusted EPS $0.63, reflecting pressure in U.S. Retail Pharmacy (promotion, shrink, reimbursement) partially offset by continued strength in International and a second consecutive quarter of positive U.S. Healthcare adjusted EBITDA .
  • Management lowered FY24 adjusted EPS guidance to $2.80–$2.95 from $3.20–$3.35 due to worse U.S. consumer trends and ongoing pharmacy margin headwinds; implied Q4 adjusted EPS is ~$0.39 at the midpoint .
  • Strategic review actions: multiyear U.S. store footprint optimization (closing a significant portion of underperforming stores), a retail pharmacy action plan (pricing, assortment, omnichannel, loyalty, back-end automation), portfolio simplification (capital-light healthcare), and payer/PBM negotiations to stabilize pharmacy margins .
  • Call tone: turnaround urgency with cost savings on track ($1B in FY24) and liquidity/cash flow prioritization; investors noted negative pre-market stock reaction to the guidance reset and near-term margin pressure .

What Went Well and What Went Wrong

  • What Went Well

    • U.S. Healthcare delivered its second consecutive quarter of positive adjusted EBITDA ($23M), driven by VillageMD and Shields growth and disciplined cost management .
    • International performed solidly: Boots UK comps up (pharmacy +5.8%, retail +6.0), Boots.com +13.8% and ~15.6% of retail; Germany wholesale +4.9% constant currency .
    • Cost actions and working capital optimization improved Q3 operating cash flow ($605M) and free cash flow ($334M); CapEx reductions provided additional support .
    • Quote: “We continue to face a difficult operating environment… Informed by our strategic review, we are focused on improving our core business: retail pharmacy…” — CEO Tim Wentworth .

  • What Went Wrong

    • Retail margin and pharmacy margin underperformed expectations due to increased promotions, higher shrink, branded mix inflation, reimbursement pressure, and NADAC fluctuations (incremental ~$20M partial-quarter impact) .
    • U.S. Retail Pharmacy AOI fell 47.9% y/y to $501M, with a $277M headwind from sale-leaseback gains net of rent, lower Cencora equity income, and lapping prior-year incentive accrual reductions; management also expects no material sale-leaseback benefits going forward .
    • Outlook reset: FY24 adjusted EPS lowered to $2.80–$2.95; management expects pharmacy headwinds to persist into FY25 and a ~$0.75 EPS headwind from sale-leaseback wind-down, Cencora share sales, and normalized tax rate .

Financial Results

  • Consolidated quarterly performance
MetricQ1 2024Q2 2024Q3 2024
Sales ($USD Billions)$36.707 $37.052 $36.351
GAAP Diluted EPS ($)$(0.08) $(6.85) $0.40
Adjusted EPS ($)$0.66 $1.20 $0.63
Gross Margin (GAAP)18.4% 19.0% 17.8%
Adjusted Operating Margin (%)1.6% 2.2% 1.4%
  • Q3 year-over-year comparison
MetricQ3 2023Q3 2024
Sales ($USD Billions)$35.415 $36.351
GAAP Diluted EPS ($)$0.14 $0.40
Adjusted EPS ($)$1.00 $0.63
Gross Margin (GAAP)18.6% 17.8%
Adjusted Operating Margin (%)2.4% 1.4%
  • Segment breakdown (Q3 FY24)
SegmentSales ($USD Billions)Adjusted Operating Income ($USD Millions)
U.S. Retail Pharmacy$28.503 $501
International$5.727 $175
U.S. Healthcare$2.125 $(22)
Corporate & Other$(0.003) $(42)
Total$36.351 $613
  • Key KPIs
KPIQ2 2024Q3 2024
U.S. comparable sales (%)+4.8% +3.5%
U.S. pharmacy comparable sales (%)+8.7% +5.7%
U.S. retail comparable sales (%)−4.3% −2.3%
Prescriptions filled (30-day equivalents, millions)305.7 306.4
Boots UK pharmacy comps (%)+1.7% +5.8%
Boots UK retail comps (%)+5.9% +6.0%
Boots.com sales growth (%)+16.8% +13.8%
Boots.com share of retail (%)>17% 15.6%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Adjusted EPSFY 2024$3.20–$3.35 $2.80–$2.95 Lowered
Adjusted EPS (Q4 implied)Q4 2024N/A~$0.39 (midpoint implied) New disclosure
U.S. Healthcare Adjusted EBITDAFY 2024Breakeven at midpoint Breakeven at midpoint Maintained
Adjusted Effective Tax RateFY 2024N/AUnder 5% New disclosure
U.S. Retail comparable salesFY 2024N/A~−3% New disclosure
DividendOngoingCut to $0.25/qtr (Q1 announcement) No change in Q3 releaseMaintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1, Q2)Current Period (Q3)Trend
U.S. consumer backdropQ1: challenging consumer; dividend cut to preserve capital Persistent weakness; higher promotions impacting retail margin Deteriorating near term
Pharmacy margins & NADACQ2: reimbursement pressure; headwinds noted Mix inflation, reimbursement pressure; NADAC fluctuations (~$20M partial-quarter) Negative; stabilizing efforts underway
U.S. Healthcare profitabilityQ1: adj. EBITDA loss improving Second consecutive positive adj. EBITDA ($23M) Improving
Sale-leaseback & CencoraQ2: wind-down; lower earnings from Cencora share sales $277M AOI headwind from sale-leaseback; no material benefits going forward Structural headwind
Store footprint optimizationQ1: cost focus Plan to close significant portion of underperforming U.S. stores over 3 years Accelerating action
Omnichannel & loyaltyQ1/Q2: digital strength at Boots.com 80% same-day delivery <1 hour; expanding myWalgreens loyalty Building capabilities
Back-end pharmacy automationLimited prior disclosureRe-accelerating back-end automation to improve efficiency and free labor Scaling
Payer/PBM negotiationsNot emphasizedActive discussions to align incentives and stabilize economics Intensifying
Cost savingsQ1: rightsizing; Q2: $1B target re-affirmed On track to deliver $1B in FY24 On track

Management Commentary

  • “Our results and outlook reflect [consumer and pharmacy margin] headwinds, despite solid performance in both our International and U.S. Healthcare segments.” — Tim Wentworth, CEO .
  • “We are finalizing a multifactor store footprint optimization program… including the closure of a significant portion of underperforming stores over the next 3 years.” — Tim Wentworth .
  • “We are laser-focused on being paid fairly for the value we provide… collaborating with PBM partners to change models and align incentives.” — Mary Langowski, President U.S. Healthcare .
  • “Sale-leaseback gains… resulted in a $277M headwind to AOI in the quarter… we do not anticipate any material benefits from sale-leaseback gains going forward.” — Manmohan Mahajan, CFO .

Q&A Highlights

  • Pharmacy economics and NADAC: CFO quantified ~$20M partial-quarter NADAC impact and highlighted volatility; payer contracts tied to NADAC being addressed; broader pharmacy mix/reimbursement headwinds persist .
  • Store closures economics: Retain “nearly all” prescriptions when closing; closures expected to be EPS/cash accretive after removing related fixed costs; disciplined lease exit strategy .
  • Free cash flow: Q3 positive FCF; Q4 FCF expected positive despite ~$150M opioid payment; broader priority to boost cash generation .
  • FY25 bridge: Persistent consumer and pharmacy headwinds assumed; ~$0.75 EPS headwind from sale-leaseback wind-down, Cencora share sales, and normalized tax rate; Healthcare and International profitability growth expected .
  • Strategy: Capital-light healthcare focus; VillageMD to pursue liquidity/optionality while WBA remains an investor/partner; specialty, clinical trials, and pharma services prioritized .

Estimates Context

  • Wall Street consensus estimates from S&P Global were unavailable for WBA Q3 FY24 due to a CIQ mapping issue; therefore, estimate comparisons are not provided in this recap.

Key Takeaways for Investors

  • Guidance reset and pharmacy margin pressures are the near-term overhang; FY24 adjusted EPS lowered to $2.80–$2.95 with implied Q4 ~$0.39, and headwinds expected to carry into FY25 (including a structural ~$0.75 drag) .
  • Turnaround plan is concrete: store footprint optimization, pricing/promo recalibration, assortment focus, omnichannel/loyalty, and back-end automation should support gross/operating margin stabilization over time .
  • U.S. Healthcare is inflecting: two consecutive quarters of positive adjusted EBITDA, with further improvement expected; portfolio shifting to capital-light services alongside continued partnership/investment in VillageMD and strength at Shields .
  • International (Boots UK, Germany wholesale) remains a key contributor with healthy comps and digital growth, providing diversification vs U.S. Retail volatility .
  • Cost savings and cash discipline are real: on track for $1B cost savings in FY24; Q3 operating cash flow and FCF improved via working capital and CapEx reductions; Q4 FCF guided positive despite opioid cash payments .
  • Payer/PBM negotiations are a critical catalyst: progress on reimbursement models and NADAC-linked contracts could be a margin stabilization lever; watch for updates by fiscal year-end .
  • Trading setup: Expect continued estimate/valuation pressure near term given guidance reset and pharmacy dynamics; look for signals of pharmacy margin stabilization, execution on closures, and sustained Healthcare EBITDA as potential sentiment inflection points .