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Q3 Sales Surge
In the third quarter, Walgreens demonstrated impressive sales growth, with revenues surging 8.6% compared to the previous year, reaching $35.4 billion. Primarily driven by the strong performance of the U.S. Retail Pharmacy and International segments. Additionally, the U.S. Healthcare segment played a significant role in contributing to this positive sales trend. Despite facing headwinds from various challenges, the company’s ability to achieve substantial sales growth underscores its resilience and market position.
Operating Loss and Adjusted Income
While the sales growth was impressive, Walgreens faced financial hurdles in the third quarter. The company reported an operating loss of $0.5 billion, a notable increase from the $0.3 billion loss in the same period the previous year. This loss was primarily attributed to a non-cash impairment of pharmacy license intangible assets in Boots UK, amounting to $431 million. However, on a positive note, the company’s adjusted operating income demonstrated a modest increase of 0.6% on a constant currency basis, amounting to $1.0 billion. This growth was driven by improvements in the U.S. core pharmacy and International segments, although it was partly offset by lower COVID-19 vaccination and testing volumes, planned payroll investments in U.S. Retail Pharmacy, and U.S. Healthcare investments.
Impact on Profitability
Walgreens’ net earnings for the third quarter stood at $118 million, a significant decrease from the $289 million reported in the same period last year. The decline in net earnings can be primarily attributed to the operating loss experienced during the quarter.
Analyzing Financial Health
The company faced a notable challenge in its cash flow during the third quarter. Net cash used for operating activities amounted to $20 million, raising concerns among investors. Moreover, free cash flow presented a negative value of $444 million, marking a substantial $1.7 billion decrease compared to the same quarter last year. The drop in free cash flow can be attributed to the phasing of working capital and increased capital expenditures, including investments in growth initiatives and U.S. Healthcare.
Stock Price and Guidance
The disappointing earnings results in the third quarter had a significant impact on Walgreens’ stock price, which reached its lowest level since 2010. The market’s reaction reflects investor concerns about the company’s financial performance and outlook. Additionally, Walgreens’ management took the step of slashing its forward earnings guidance significantly, reducing it from the previous range of $4.45 to $4.65 per share to a new range of $4.00 to $4.05 per share. This revision in guidance further heightened investor apprehension.
Management’s Take
To shed light on the lowered guidance, Walgreens’ management cited several factors. These included reduced demand for COVID vaccines and testing kits, shifts in consumer preferences towards value products, and labor shortages, which led to rising labor costs. These factors combined to impact the company’s financial performance and outlook for the near term. In my opinion, all these factors could have been seen at the end of last year, and the management got it wrong with their initial estimations.
The significant decline in cash from operations during the third quarter (-$20 million) raises concerns about the safety of Walgreens’ dividends. This sharp drop compared to the $746 million reported in the previous quarter (FQ2’23) and $1.62 billion in the same quarter last year (FQ3’22) naturally raises eyebrows among dividend-focused investors.
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To offset the impact of the above financial challenges, Walgreens announced immediate cost-cutting measures. Amid these financial challenges, there is a silver lining for investors. Walgreens managed to exceed sales expectations, achieving a growth rate of 8.9% year-over-year. This positive sales performance showcases the company’s ability to adapt and capitalize on opportunities despite the prevailing headwinds.
My view on dividend safety
While the third-quarter results presented several challenges for Walgreens, it is essential for investors to take a comprehensive view of the company’s performance and outlook. The robust sales growth, even amid challenges, showcases the company’s resilience and ability to adapt in a dynamic market.
Although the operating loss and the decline in net earnings raise concerns, the company’s management remains committed to navigating the evolving market landscape. The immediate cost-cutting measures demonstrate proactive steps to address the impact and stabilize the financial position.
Regarding dividend safety, the significant decline in cash from operations during the third quarter has raised questions. However, considering the company’s historical track record and its projected cash flow potential, there are indications that Walgreens remains committed to maintaining its dividend. Based on historical data and utilizing the company’s FY2022 free cash flow margin of 1.6%, it is estimated that Walgreens could generate approximately $2.21 billion of cash flow for FY2023
Investors should closely monitor the company’s ongoing efforts to overcome challenges and its progress in delivering on its revised earnings guidance. As always, conducting thorough research and keeping a long-term perspective is crucial for dividend investors looking to make informed decisions and ensure the safety and growth of their investments.
WBA Dividend Review: Walgreens Boots Alliance | Engineer My Freedom
In conclusion, while challenges exist, Walgreens’ dividend safety and overall financial health warrant careful observation. The company’s strategic initiatives and sales performance offer glimpses of hope for me as an investor. learning from past mistakes, I understand the significance of a long-term approach to dividend growth investing. With that said, I will not be adding to my current position but will continue to hold my current share allocation.
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