Walgreen Earnings Not Enough to Overcome Decision to Stay in US

Source: Courtesy of Walgreen
Walgreen Co. (NYSE: WAG) reported fiscal fourth-quarter and full-year 2014 results before markets opened Tuesday morning. For the quarter, the drugstore chain reported adjusted diluted earnings per share (EPS) of $0.74 on revenues of $19.1 billion. In the same period a year ago, Walgreen reported EPS of $0.73 on revenue of $17.9 billion. Fourth-quarter results also compare to the consensus estimates for EPS of $0.74 and $19.02 billion in revenue.

For the full year, Walgreen posted EPS of $3.28 on sales of $76.4 billion, compared with 2013 EPS of $3.12 on revenues of $72.2 billion. Consensus estimates called for EPS of $3.29 on sales of $76.34 billion.

On a GAAP basis the company posted a net loss of $239 million in the fourth quarter ($0.25 per share) due to a non-cash charge of $866 million ($0.90 per share) on the amendment and exercise during the quarter of Walgreen’s call option on Alliance Boots. The company explained:

This non-cash loss resulted from a reduction in the amended option’s fair value (without regard to its strategic value) compared with the original option’s book value, primarily due to the reduction in the duration of the amended option and the appreciation since the original valuation in the price of Walgreens stock to be used as partial consideration for the purchase of the remaining 55 percent ownership interest in Alliance Boots.

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Front-end (i.e., non-prescription) same-store sales rose 1.2% in the fourth quarter and total sales rose 6.2%. Traffic was down 2.2%, though basket size grew by 3.5%. Total same-store sales rose 5.4% in the quarter.

Prescription sales accounted for 65.7% of revenues in the fourth quarter and were up 9.3% year-over-year. Same-store prescription sales were up 7.8%.

Walgreen did not offer any specific guidance updates in its earnings release, but the consensus estimates for the first quarter call for EPS of $0.76 on revenues of $19.18 billion. Full-year consensus estimates are EPS of $3.57 on revenues of $79.54 billion.

The company’s CEO said:

We closed the fiscal year by exercising the option for the second step of our strategic transaction with Alliance Boots, completing the transition of our pharmaceutical distribution to AmerisourceBergen and driving continued improvement in our daily living business that resulted in our largest year-over-year quarterly and fiscal-year sales increases in three years. … [W]e maintained solid expense control in the fourth quarter and are moving forward with the implementation of our previously announced cost-reduction initiative to achieve $1 billion in savings by the end of fiscal 2017.

Walgreen saw its shares fall sharply to $57.75 in August from $68.74, which was a total loss of roughly 16%. Share prices dropped when Walgreen refused to invert its corporate domicile for a lower effective tax rate when it acquired Alliance Boots. Since that time, share prices have held consistently in a trading range of just under $60 to $64 — breaking back under the $60 handle on Monday.

Options traders are braced for a move of up to $2.00 in either direction, based on the $60 puts and calls. There is active trading in many of the strike prices in both the puts and calls for October expiration.

Walgreen’s stock chart has some equal concerns. The 50-day moving average dipped under the 200-day moving average a week or so ago. That 200-day average is now up at $65.07, and the 50-day moving average is $63.86. It would seem that these moving averages may continue to act as resistance on the chart.

Shares were up about 3.3% in premarket trading Tuesday morning, at $61.56 in a 52-week range of $54.11 to $76.39. Thomson Reuters had a consensus analyst price target of $70.30 before the results were announced.

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