Walgreens Boots Alliance, Inc. reported dismal fourth-quarter earnings that managed to exceed low-ball estimates. Shares surged in response to surpassed expectations.
Walgreens reported adjusted earnings per share (EPS) of $1.02, down 28.2% from the same period last year, but outperforming analyst estimates of $.96.
Sales, meanwhile, increased 2.3% to $34.7 billion, outperforming revenue estimates of $34.4 billion.
Far from a sign of health, Walgreens’ earnings report, which boasts impressive sales alongside low profits, reveals the company increased its sales volume by lowering prices, cutting into net income.
“Looking at Walgreens, sales numbers are not the best thing to look at because part of their sales growth has come at the expense of profit margin, particularly on the pharmacy side,” John Ransom, analyst, managing director of healthcare research at Raymond James said.
Ransom said Walgreens signed a number of deals with insurance providers like Medicare that have narrow network rates—sales that don’t generate substantial profit.
The company’s gross profit, which reflects profit after deducting the cost of goods sold, is a better metric of overall performance.
Retail sales rose 1.7% year-over-year, driven by an increased demand for PPE and e-commerce—Walgreens.com sales, alone, soared 39%. Gross profit, however, took a hit.
Walgreens’s adjusted gross profit decreased 4.5% from the same period last year, the result of pharmacy reimbursement rates—high fees for wholesale drugs— and heightened supply chain costs brought on by the pandemic’s disruptions to shipping.
The hit came even after the pharmacy chain invoked cost-saving methods like shuttering unprofitable stores. Walgreens had announced plans to close 200 stores in 2020 prior to the pandemic.
International retailer Boots UK, whose sales are driven mainly by front-of-store purchases, accounted for a large portion of Walgreens modest earnings. The across-the-pond chain suffered a blow to sales and gross profit margin after Covid-19 decimated footfall traffic. Boots UK sales decreased 16.7% and gross profit slipped 24.7% year-over-year.
“Boots is like a Sephora, you know, sort of an in-store experience around beauty and makeup. A COVID-socially-distanced environment disrupts that business,” said John Petrides, portfolio manager at Tocqueville Asset Management.
Walgreens can’t place all the blame for its poor quarter on the pandemic. The chain has suffered for several years, reporting margin decline since 2016, as shoppers have turned away from brick-and-mortar pharmacies. Competitor CVS has experienced a similar hit to business, a downward trend likely to continue without a successful pivot to online sales.
“Walgreens’ business model has been perceived as what people call a melting ice cube, which is just constant declines in gross profit dollars,” said Ransom. “It’s just hard to see how they can offset that.”