Walgreens Boots Alliance, Inc.(WBA - Analyst Report) reported adjusted earnings per share (EPS) of $1.03 in the first quarter of fiscal 2016, up 32.1% from the year-ago adjusted number. Adjusted EPS also beat the Zacks Consensus Estimate by a solid 6.2%.

On a reported basis, net earnings came in at $1.1 billion or $1.01 per share, a significant improvement of 30.6% or 13.5% respectively, from the year-ago quarter. Per management, overall earnings growth was primarily driven by the cost cutting initiatives recently adopted by management and improved adjusted operating income margins.

Walgreens Company (WBA - Analyst Report) Street EPS & Surprise Percent - Last 5 Quarters | FindTheCompany

Total Sales

Walgreens Boots recorded total sales of $29 billion in the fiscal first quarter, up 48.5% year over year primarily due to the inclusion of Alliance Boots’ consolidated results. However, the top line missed the Zacks Consensus Estimate of $29.6 billion.

Segments in Detail

Walgreens Boots currently reports under three operating segments: Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale.

The Retail Pharmacy USA division delivered sales of $20.4 billion in the reported quarter, reflecting an increase of 4.2% on a year-over-year basis. Within this segment, while total sales in comparable drugstores increased 5.8%, retail comparable store sales dropped 0.6% year over year on account of a reduction in unprofitable promotions and the transitioning of seasonal items away from holiday decorations toward higher quality, giftable items.

Pharmacy sales, which accounted for 68.4% of the division’s sales in the quarter, increased 6.7% from the year-ago quarter, while pharmacy sales in comparable stores climbed 9.3%.

The Retail Pharmacy International division delivered sales of $3.5 billion. On a constant exchange rate (CER) basis, comparable store sales in the first quarter increased 2.2% year over year, with particularly strong growth in Mexico and the Republic of Ireland.

The Pharmaceutical Wholesale division recorded quarterly sales of $5.8 billion, up 3.1% year over year, at CER and excluding acquisitions and dispositions.

Margins

Gross profit increased 41.7% year over year to $7.50 billion, while adjusted gross profit improved significantly from $143 million to $5.5 billion. However, as expected, adjusted gross margin contracted 130 basis points (bps) to 26%, on account of lower pharmacy reimbursement rates, an increase in Medicare Part D prescriptions and the mix of specialty medications.

Adjusted selling, general and administrative (SG&A) expenses declined 38.6% to $5.8 billion. Adjusted operating income increased 11.2% to $1.2 billion. Consequently, adjusted operating margin expanded 20 bps to 5.9%.

Financial Condition

Walgreens Boots exited the reported quarter with cash and cash equivalents of $2.6 billion, down from $3 billion in the fourth quarter of fiscal 2015. Long-term debt was $13.2 billion, compared with $13.3 billion in the prior quarter.

Moreover, the company generated operating cash flow of $732 million in the reported quarter compared with $1 billion a year ago. The resultant free cash flow was $392 million.

Guidance

Walgreens Boots updated its EPS guidance for fiscal 2016. The company currently expects to earn adjusted EPS in the $4.30–$4.55 range for the full fiscal, narrower than the earlier guided $4.25–$4.55. The Zacks Consensus Estimate for fiscal 2016 earnings is $4.43, within the company’s guidance range.

This guidance assumes no material accretion from the proposed acquisition of Rite Aid.

Progress on Rite Aid Acquisition

In October 2015, Walgreens Boots announced that it has agreed to acquire U.S.-based retail pharmacy chain – Rite Aid Corp. (RAD - Analyst Report), for a total enterprise value of $17.2 billion, including acquired net debt. The transaction is expected to close in the second half of calendar year 2016. Rite Aid has scheduled a special meeting of its stockholders for Feb 4, 2016 to, among other things, consider and vote on a proposal to approve the agreement and plan of merger related to the impending acquisition.

Walgreens Boots expects this transaction to be accretive to its adjusted EPS in its first full year after completion. Additionally, the company expects to realize synergies in excess of $1 billion.

Our Take

Walgreens Boots reported a mixed first-quarter fiscal 2016 with earnings comfortably beating the Zacks Consensus Estimate, while the top line closely missed the mark. We note that the reported results echo the trend exhibited by the company in the preceding two quarters as well. On a brighter note, the company holds a strong cash balance position, while its proposed buyout of Rite Aid is expected to expand its business realm in the U.S. over the long term.

Meanwhile, generic inflation in the pharmaceutical industry continued to have an adverse effect on Walgreens Boots’ store pharmacy sales, as is evident from the 130 basis point contraction observed in the company's gross margin in the reported quarter.

Nevertheless, the synergies from the Walgreen Co. and Alliance Boots merger continue to boost our confidence in the stock. Combined net synergies as of fiscal 2016 first quarter were $288 million and the company is well on track to reach at least $1 billion in synergies in fiscal 2016.

 Zacks Rank

Walgreens Boots currently has a Zacks Rank #3 (Hold). Some better-ranked medical stocks are LeMaitre Vascular, Inc. (LMAT - Snapshot Report), Nxstage Medical, Inc. (NXTM - Snapshot Report) and Abaxis, Inc. (ABAX - Analyst Report). While LeMaitre Vascular and Nxstage Medical sport a Zacks Rank #1 (Strong Buy), Abaxis holds a Zacks Rank #2 (Buy).