Walgreens Raises FY 2021 EPS Guidance After Strong Q3

Narrow-moat Walgreens WBA posted strong third-quarter results exceeding total sales growth expectations. Following that strong third quarter, the firm increased its EPS outlook for fiscal 2021 to around 10% from mid to high single digits. Walgreens administered 17 million COVID-19 vaccines during the quarter, which has been quite lucrative for the organization, but shares appear to be reacting negatively to management estimates of a slowdown in the fourth quarter, with only 7 million additional vaccinations expected. This estimate would put the company on track to reach the lower end of its prior guidance of 26 million-34 million vaccines in fiscal 2021. For Walgreens, U.S. COVID-19 vaccines have provided a tailwind to pharmacy margins and contributed to 15.5% U.S. gross profit growth year over year, and investors appear concerned that a slowdown in that catalyst could foreshadow a slowdown in its earnings growth in the near future. Total company sales grew 10.4% on a constant currency basis, with revenue in its German joint venture (not included in the comparable period) contributing 460 basis points of that growth. The firm's International segment grew 12.1%, factoring out currency gains and joint venture revenue. These results reflect a partial recovery in Boots UK, which faced a steep drop in sales at the onset of the pandemic. U.K. restrictions resulted in the company closing over 10 locations--primarily in high-traffic areas at train stations and airports, and the temporary closure of its beauty and fragrance counters. As a result of a steep drop in sales, Walgreens recognized a $2 billion non-cash impairment charge in the third quarter of 2020. We expect the easing of restrictions in the U.K. and a pick-up in travel to be tailwinds in the fiscal fourth quarter of 2021. We plan to incorporate these operating and financial results in our model, but at first glance, our fair value estimate and narrow-moat rating will likely remain unchanged.

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