Walgreens raises guidance in anticipation of successful Rite Aid merger

Dive Brief:

Walgreens Boots Alliance on Thursday reported Q1 sales declined 1.8% to $28.5 billion, or increased 1.1% on a constant-currency basis, missing the FactSet analyst consensus for $29.2 billion. The retailer nevertheless raised the lower end of its guidance for fiscal year 2017 by 5 cents per share and now anticipates adjusted diluted net earnings of between $4.90 to $5.20 per share.
Q1 diluted net earnings were $1.054 billion, or 97 cents per share, down 4% from $1.110 billion, or $1.01 per share, in the same quarter last year. Q1 adjusted earnings rose 6.8% (or 9.7% on a constant-currency basis) to $1.10 per share, beating the FactSet analysts consensus for $1.09 per share.
The guidance rests in part on the company’s confidence that its proposed $9.4 billion merger with Rite Aid will be accretive to its adjusted diluted net earnings per share after closing of the transaction. On a conference call with analysts, released by Seeking Alpha, CEO Stefano Pessina said there is no “plan B” if the merger is thwarted.

Dive Insight:

Pessina, overall pleased with the quarters' results, told analysts on Thursday that despite the concerns of the Federal Trade Commission the company wasn't thinking about the possibility that its proposed merger would not go through.

“[W]e have had a very good relationship with the people of the FTC and they have continued to ask information and we have continued to gain information, and in reality we believe that if they have spent so much time asking self, and analyzing so many documents is because they want to understand the transaction, which is fine," he said. "So we are not thinking of a Plan B today.”

Pessina added that it would be a “big surprise” if the merger didn’t go through, but in that case the company would adjust. “[W]e would have to sit down and decide what to do because there are many, many possible reaction to this, as you can imagine,” he said. “We would have to see what our counter party Rite Aid wants to do and see whether there are solutions or not, what are the other alternatives. In reality we would have money and we would use the money in the best interest of shareholders.”

To assuage antitrust regulators, Walgreens Boots Alliance and Rite Aid Corporation last month announced an agreement with Fred's Pharmacy, which will purchase 865 stores and certain assets related to store operations located across the eastern and western United States for $950 million in cash.

The company also said Thursday that its Q1 U.S. retail pharmacy sales were $20.7 billion, up 1.4% over the year ago quarter, with same-store sales up by 1.1% and adjusted gross profit of $5.5 billion, up 0.1% over the year ago quarter. The increase in retail was partially offset by a decline in pharmacy sales, which were hit by a drop in Medicare prescription volumes, according to CFO George Fairweather.

He said that the company’s efforts to boost its beauty offerings are paying off. A new loyalty program in the space, Beauty Enthusiast, has seen signups and incremental spend among Beauty Enthusiasts beyond expectations and beauty sales have risen in remodeled stores.