Company Overview: Walgreens Boots Alliance, Inc. (NASDAQ: WBA) is one of the leading companies in retail and wholesale pharmacy and health and beauty products. The company has three reportable segments namely Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale. The company has more than 100 years of trusted health care heritage with presence in over 25 countries. Notably, the company has more than 450,000 employees and over 21,000 stores.

WBA Details

WBA Rides on Cost-Cutting Initiatives & Strategic Alliances: Walgreens Boots Alliance, Inc. (NASDAQ: WBA) is a leading player in retail and wholesale pharmacy, engaged in dispensing and distributing medicines, via its retail stores, digital platforms and health and beauty products. The company has entered into several strategic partnerships and alliances with different leaders in the technology, health and retail sectors. These strategic partnerships, initiatives and alliances are in-line with the company’s goal and mission to enhance its customer offerings. Most recently, the company completed its previously announced joint venture agreement with McKesson Corporation (NYSE: MCK) to merge their individual pharmaceutical wholesale businesses (Alliance Healthcare Deutschland and GEHE Pharma Handel) in Germany. As per the agreement, WBA holds a 70% controlling equity interest in the joint venture and McKesson holds the remaining 30%. The move strengthens WBA’s prospects of pharmaceutical distribution in the German market.

Coming to the past financials’ performance, the company witnessed a CAGR of 7.3% in revenue over the period of FY15-FY19. Gross profit for the same period saw a CAGR of 3%. 

Past Financial Performance (Source: Company Reports)

With global needs surrounding the healthcare sector, WBA remains committed to bolster the pharmacist's position as a healthcare professional, thereby establishing advanced value-added services and substantially boosting digitalization and operational quality. The company has collaborated with Alphabet’s life sciences and healthcare segment Verily on various projects on chronic ailment. WBA has also expanded its primary care clinics by working together with VillageMD. The company also inked a partnership deal with Microsoft Corporation (NASDAQ: MSFT) and Adobe Inc (NASDAQ: ADBE) to launch the latest technology and customer data resource, which will form the foundation of a brand-new customer engagement platform. To concentrate on high-quality brands in the retail space, WBA improved its electronic accessory offerings that customers are looking for, which included the deal with Apple Inc. (NASDAQ: AAPL) to sell their branded accessories. Moreover, its strategic alliance with UK's LIVI also boosts the optimism. WBA’s other substantial partnerships established in recent times are with Kroger, LabCorp and UnitedHealthcare.

Although the company’s Pharmaceutical Wholesale division is by far the most affected segment led by COVID-19 outbreak, it has been taking necessary steps to assist the ongoing healthcare crisis by offering medicines and guidance to patients. Further, the company is also ensuring seamless operations of the supply chain to patients, thus staying afloat in these difficult times. Moreover, the latest joint venture with McKesson in Germany has also started to enhance WBA’s reach and scale in the significant German pharmaceutical wholesale market.

WBA’s Strategic Priorities (Source: Company Reports)

4QFY20 Key Highlights: During the quarter, the company reported adjusted earnings per share (EPS) of $1.02, which declined ~28.7% year over year (down 27.9% at constant exchange rate). The decline in the bottom-line was primarily due to the negative impact of COVID-19 pandemic. Nonetheless, the company’s Transformational Cost Management Program savings were key positive during the quarter. FY20 adjusted EPS was $4.74, down 20.9% year over year. Total sales in 4QFY20 went up by 2.3% and came in at $34.75 billion. FY20 revenues reflected an increase of 1.9%, year over year (up 2.5% at constant exchange rate). The company opined that despite the challenges, the company faced steady progress in key U.S. and U.K. markets. Further, continued decent performance in the wholesale business and enhanced growth in the e-commerce platforms were key positives. Selling, general and administrative expenses came in at $6.21 billion, down 3.1% on a year over year basis. Operating profit in 4QFY20 stood at $593 million, down from $819 million reported in 4QFY19.

Key Financial Highlights (Source: Company Reports)

Segmental Highlights: Revenues from Retail Pharmacy USA came in at $27 billion in 4QFY20, up 3.6% year over year. Sales in comparable stores went up by 3.6% on a year over year basis. Pharmacy sales increased 4.2% from 4QFY19, whereas comparable pharmacy sales went up 3.2% year over year. Retail sales went up marginally 1.5% on pcp. Higher demand for PPE and performance of the mass personalization initiative were key positives. In the reported quarter, Walgreens.com sales increased 39% year over year.

Revenues at the Retail Pharmacy International division stood at $2.3 billion, down 14.9% on a year-over-year basis in 4QFY20. Boots UK’s comparable retail sales went down 29.2% at a constant currency basis due to COVID-19 impact. However, WBA UK’s comparable pharmacy sales went up marginally 0.4% on constant currency rate, mainly due to favorable timing on National Health Service reimbursement.

Quarterly sales from Pharmaceutical Wholesale rose 4.3% year over year and came in at $5,987 million, owing to growth in Germany and France.

Segmental Highlight (Source: Company Reports)

Liquidity and Balance Sheet Highlights: The company exited FY20 with cash and cash equivalents of $516 million and long-term debt amounted to $12.20 billion. The company generated strong cash from operating activities in FY20, which came in at ~$5.5 billion and free cash flow amounted to $4.1 billion. Strong cash flow generation was primarily driven by working capital optimization. During the period, the company witnessed working capital cash flow improvement of $1.4 billion, primarily driven by key initiatives of cost management. The company paid a quarterly dividend of 46.75 cents per share, up 2.2% year over year, depicting the 45th consecutive year of raising the dividend.

Cash Flow Management (Source: Company Reports)

Key Updates:

• On 16 November 2020, the company informed the market that it has been chosen as an index component of the Dow Jones Sustainability Indices (DJSI), moving into the North America index. This depicts the company’s outstanding performance in corporate sustainability.
  
  
• On 30 October 2020, the company appointed Valerie Jarrett to its Board of Directors, with immediate effect.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 41.09% of the total shareholding. Alliance Sante Participations S.A. and The Vanguard Group, Inc. hold the maximum interests in the company at 16.72% and 6.78%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: The company reported a cash cycle of 2.4 days in FY20, lower than the industry median of 19.1 days. Further, debt to equity ratio in the same time span stood at 0.81x, lower than the industry median of 1.1x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: COVID-19 led disruptions have impacted the company’s financial performance in FY20. Such disruptions have pushed traditional bricks-and-mortar retail stores into difficult times. Although 4QFY20 saw the easing of restrictions in many regions, the company is unlikely to see any immediate bounce back in its business. Further, the company’s international businesses during the pandemic suffered as most of the international trade remained standstill. Furthermore, high debt may limit growth and any further increase in borrowings might worsen its risk profile. Additionally, fierce competition and tough industry conditions add to the woes.

Outlook: Going forward, the company is likely to benefit from accelerating the digitalization program, thereby transforming the customer experience. The company also remains on track to invest in both pharmacy and retail to drive volume and customer loyalty. Looking ahead, the company anticipates coming out stronger in FY21. Further, the company expects to save more than $2 billion of annual cost by FY2022. The company expects adjusted earnings per share in FY21 to reflect low single-digit constant currency growth. Despite, the global uncertainty expected in the first half of fiscal 2021, the company anticipates a gradual recovery from the coronavirus impact. The company also expects 2HFY21 to indicate excellent adjusted EPS growth as improvement plans take place in important markets. 

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of WBA closed at $38.23 with a market capitalization of ~$33.1 billion. The stock made a 52-week low and high of $33.36 and $62.38, respectively, and is currently trading below the average of its 52-week trading range. The stock went up ~3.4% in the last one-month period. On a technical analysis front, the stock has a support level of ~$35.71 and an immediate resistance level of ~$41.87. Considering the above factors, we have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers like CVS Health Corp (NYSE: CVS), Rite Aid Corp (NYSE: RAD), and Cardinal Health Inc (NYSE: CAH), to name a few. Considering, the aforesaid facts, performance in 4QFY20, excellent sales of Boots.com and Walgreens.com, current trading level and valuation, we recommend a “Buy” rating on the stock at the closing price of $38.23, down by 2.94% on 18 November 2020.

WBA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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