Walgreens Boots Alliance (WBA) missed on fiscal second quarter earning and reported stunningly weak guidance on Tuesday morning for its fiscal second quarter ending in February.
Shares of the pharmacy chain were down significantly in pre-market trading after the company reported earnings of $1.64 per share, $0.08 short of the consensus $1.73, and revenues that came in line with the Street.
Looking at the full year 2019, Walgreens said it sees "roughly flat" profits, markedly lower than that 7% to 12% growth if had predicted, thanks in part to falling generic drug prices.
The unexpectedly low guidance is reminiscent of competitor CVS Health (CVS) which fell strongly after issuing its own cautious guidance earlier this year. In hindsight, the comments from CVS CEO Larry Merlo on the macro environment could have been a sign of caution to investors in the pharmacy industry.
"The market challenges and macro trends we have been discussing for some time accelerated, resulting in the most difficult quarter we have had since the formation of Walgreens Boots Alliance," said CEO Stefano Pessina, addressing these broader issues. "During the quarter, we saw significant reimbursement pressure, compounded by lower generic deflation, as well as continued consumer market challenges in the U.S. and UK."
"While we had begun initiatives to address these trends, our response was not rapid enough given market conditions, resulting in a disappointing quarter that did not meet our expectations," he added. "As a result, we are now expecting roughly flat adjusted EPS growth for fiscal 2019."
Analysts noted that the revision was well below even their more conservative estimates and will likely reverberate through peer stocks on the day.
"This was truly a terrible print, as most metrics missed materially," Evercore ISI analyst Ross Muken said. "The deterioration in U.S. pharmacy is particularly concerning, especially in light of CVS' recent challenges."Pessimistic Print
The weak guidance and pressure from pharmacy benefit managers and generic pricing were clearly the catalysts to the share slide Tuesday and were cited by Pessina as prominent pressures.
Dissecting the print, it does not get much more optimistic.
The company noted that operating income fell 10.4% year over year as a result of rising reimbursement pressure in the U.S. pharmacy business.
The release states that there were "fewer opportunities for mitigation as a result of slowing deflation of generic medications" which was unable to be buoyed by retail performance and remained "challenging" on a same store sales basis, particularly abroad.
Gross margin was also a weak point, falling 210 basis points year over year, fueled by major deterioration in U.S. pharmacy margins.
Sales for the second quarter rose to $26.3 billion, an increase of 7.3% year over year, with nearly 6% of the increase coming directly from the acquired locations.
To make up for the lagging results, the company noted it will react quickly to the troubling macro trends present in the pharmacy industry, which include regulatory, technological, as well as consumer driven risks.
"We are going to be more aggressive in our response to these rapidly shifting trends," Pessina said. "We are focusing on our operational strengths and addressing weaknesses, making a number of senior appointments to bring change and accelerating the digitalization and transformation of our business."
He noted that the strategy will include redeveloping locations, leveraging partnerships that include names like Microsoft (MSFT) and Alphabet's (GOOGL) Verily, reassessing the company's nearly 10,000 store-strong footprint, and accelerating cost savings programs.
"As a result of these actions, our business model will deliver improved performance in fiscal 2020, positioning us for mid-to-high single-digit growth in adjusted EPS in the following years," Pessina said.
For 2019, the pharmacy is beginning to look like one of the sickliest sectors in the market.
"We expect material pressure in WBA shares today with little management can say on the conference call to instill confidence," Evercore's Muken concluded.
At least investors may have an opportunity to pick up some CBD as they lick their wounds.
An earnings conference call is scheduled for 8:30 a.m. ET. Click here to listen in.