BofA Cuts Walgreens Earnings Estimate, Says Visibility Limited On Pharmacy Chain's Growth

Walgreens Boots Alliance Inc WBA has struggled in 2020, but its problems started well before the COVID-19 economic disruption.

The stock is now down 52.3% over the last five years, and BofA Securities analyst Michael Cherny said Wednesday there’s little reason to expect things to get much better for Walgreens as it begins its fiscal 2021.

BofA Cuts Walgreens Estimates: Cherny lowered BofA's fiscal 2021 EPS estimate for Walgreens from $4.95 to $4.75 after a recent conversation with the retailer's investor relation team about the longer-term outlook for Walgreens. 

BofA has slightly higher expectations for Walgreens' same-store sales growth in the next fiscal year, but also higher-than-expected technology and other SG&A investment spending, the analyst said. 

"While WBA is clearly working diligently to continue to reform the overall growth dynamics for the business, we still see limited visibility into when that pathway of better growth becomes clearer."

No Earnings Growth Visibility? BofA is still anticipating positive revenue growth in the U.S. for Walgreens in fiscal 2021, driven by an increase in prescriptions and average basket size, Cherny said. 

Yet the analyst remains skeptical of Walgreens’ ability to translate that revenue growth into profit growth.

In particular, he said mix shifts such as slowing growth in the beauty category are weighing on Walgreens’ margins. At the same time, Walmart and other retailers are facing rising costs associated with keeping their stores hygienic until the end of the pandemic.

As a result, Cherny said he is not anticipating positive total company EBIT or U.S. Retail EBIT growth from Walgreens in fiscal 2021.

BofA has an Underperform rating on Walgreens with a $40 price target.

WBA Price Action: Walgreens shares were down 2.2% at $38.63 at the time of publication Wednesday.

Benzinga’s Take: Target Corporation TGT, Walmart Inc WMT and other retailers reported record earnings and sales numbers in the second quarter.

Given Walgreens’ struggles to grow earnings and increasing online competition from Amazon.com, Inc. AMZN and others, retail sector investors simply have better opportunities elsewhere for the time being.

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