Walgreens Falls as Investors Worry That Covid Gains Won’t Last

(Bloomberg) -- Walgreens Boots Alliance Inc. shares tumbled after the pharmacy giant left its outlook for the remainder of the year unchanged, suggesting that a surge in business helped by demand for Covid-19 vaccines and testing is starting to run out of steam.

The drugstore operator reported adjusted earnings of $1.59 a share Thursday, well above the $1.37 average estimate of analysts surveyed by Bloomberg. But it affirmed its annual forecast of adjusted earnings per share growth in the low single digits -- a sign that the trends that drove the better-than-expected outcome this winter won't be sustained.

The shares slid as much as 6.9% as of 10:14 a.m. in New York, the most intraday since July.

Dispensing Covid vaccines and selling virus tests helped bolster Walgreens' results in the past quarter, and is likely to continue to contribute to the company's results as omicron's highly transmissible BA.2 strain spreads across the country. Yet holding the annual forecast at the current level implies a second-half performance well below the current consensus, analysts at Evercore ISI said in a note.

The report raises questions about “the back half outlook (what is the current assumption for 2nd Covid boosters?) as well as the jumping off point to FY23,” the Evercore analysts said.

Walgreens' vaccine and testing businesses are already shrinking with the latest virus wave receding, John Standley, head of the U.S. drugstore business, said on a call with investors and analysts. But the newly authorized fourth shot for people 50 and older has reignited interest in vaccines, and pre-travel testing is helping maintain demand, he said.

Post-Covid World

Drugstores have been under pressure for years as insurers reduce reimbursement for dispensing prescription drugs while online retailers capture a bigger piece of the market. The need for in-person testing and immunization amid the pandemic gave drugstores an opportunity to prove their worth to consumers.

Walgreens' failure to raise the full-year forecast after delivering such a resounding beat only deepened skepticism in the company's ability to grow in a post-Covid world, Jefferies analyst Brian Tanquilut said in an interview. While the company attributed the stagnation to spending on employees and new initiatives, investors are still left to doubt future earnings potential without Covid contributions.

“The key focus is 2023 guidance, and the beat did not translate to a raise for 2022,” implying that Walgreens won't be able to meet the expectations it set for the coming year, Tanquilut said.

The chain is betting that providing more health services can help navigate the industry changes and has been adding primary-care centers to its U.S. stores along with partnerships with health insurers. The newly formed Walgreens Health unit posted quarterly revenue of $527 million.

Walgreens is reinvesting profits in the unit, Chief Financial Officer James Kehoe said on the company call, stressing that the company raised the outlook for its base business.

Quarterly health and wellness product sales rose 43%, led by at-home Covid tests and cough, cold and flu products, Walgreens said. The company administered 11.8 million vaccines and 6.6 million tests in the period.

The chain's international business saw sales of $5.56 billion, up 2.6% from the year-ago quarter and below the $5.68 billion analysts expected. The company recently began a strategic review of its Boots chain of U.K. drugstores and said it remains in progress.