Analysts React To The Walgreens Q2 Earnings Miss

Walgreens Boots Alliance Inc WBA on Tuesday reported fiscal second-quarter results that fell short of expectations in what management described as the "most difficult" quarter since late 2014. Here is a summary of how some of the Street's top analysts reacted to the print.

The Analysts

• Loop Capital Markets' Andrew Wolf downgraded Walgreens from Buy to Hold with a price target lowered from $77 to $60.
• Wells Fargo's Peter Costa maintains at Outperform, price target lowered from $75 to $65.
• Morgan Stanley's Ricky Goldwasser maintains at In-Line, price target lowered from $67 to $61.
• Mizuho Securities' Ann Hynes maintains at Neutral, unchanged $67 price target.
• Raymond James' John Ransom maintains at Market Perform.

Walgreens fell more than 7 percent Tuesday and traded around $54.54 per share at time of publication Wednesday afternoon.

Loop Capital: Poor Gross Margins And Same-Store Sales

Walgreens' earnings report is highlighted by a 10.4-percent year-over-year drop in operating income to $1.935 billion and a 206-basis point gross margin contraction, Wolf said in a note. Gross margins fell faster than the 130-basis point decline in the first quarter, due mostly to pharmacy reimbursement pressures.

Wolf said same-store sales growth in the U.S. was poor at both the pharmacy and front-end while the performance in UK remained challenging. This translated to a currency adjusted total sales gain of 6.7 percent and organic sales growth of 2.5 percent, which marks a deceleration from 11.4 percent and 4.3 percent, respectively, in the prior quarter.

Wells Fargo: Strategic Initiatives Should See Success

The multiple headwinds Walgreens faced were mostly known although it did worsen faster than expected, Costa said. Management detailed strategic initiatives to improve its performance, including raising its cost-saving program from $1 billion to $1.5 billion, accelerate partnerships and invest in digital capabilities.

Management's 2019 outlook was lowered as the company expects earnings growth to be around flat. The analyst says the multiple strategic initiatives in place are likely to "bear fruit" in fiscal 2020.

Related Link: Baird Sees Struggle In Walgreens, Adds To Fresh Pick Negative List

Morgan Stanley: The 'Perfect Store' Of Industry Headwinds

Walgreens' multiple headwinds are no different than what other rival large pharmacies previously reported, Goldwasser said. The "perfect storm of industry headwinds" include higher reimbursement pressures, lower generic deflation, lower brand inflation and falling front-end same-store sales.

The analyst says Walgreens could see even more downside in 2020 as management's guidance doesn't factor in potential changes to drug pricing or reimbursement rates if the proposed rebate rule is put into law on Jan. 1, 2020.

Mizuho: Weak Cash Flow A Surprise

One of the more surprising takeaways from Walgreens' print is a poor cash flow outlook, Hynes said. Typically, the company's cash flow is an "investment highlight" but it faces an incremental $2.3 billion of headwinds in fiscal 2019 -- a "surprise to us."

Raymond James: No Near-Term Earnings Growth A Problem

Walgreens management appears confident it has the necessary initiatives in place to offset multiple headwinds as it guided to a mid-to high-single digit EPS growth after fiscal 2020, Ransom said. However, guidance also implies two years without EPS growth even when factoring in the stock buyback program and this was "clearly not well received" by the market.

Meanwhile, Ransom says management's focus on partnerships remains in the early stage and seems like a "see what sticks strategy." Coupled with the absence of no near-term earnings growth, a "cautious" stance on the stock remains justified.

Miller Tabak: Broken Stock

The stock has shown a series of lower highs and lower lows and has now broken below a multi-year trendline dating back to 2012, Maley said during a CNBC "Trading Nation" segment. Shares are now trading below 2018 and 2014 lows.

"It's just broken down too many support levels," Maley said.

Taking a look at the weekly RSI chart suggests the stock is "getting very, very oversold" and could see a "decent-sized" rebound, he said. Investors may want to avoid shorting the stock at current levels and short-term investors with high risk tolerances should consider buying at current levels.

Photo credit: Michael Rivera, Wikimedia Commons