Walgreens Boots Alliance Slips On Labor Cost Concerns Walgreen's (NASDAQ: WBA) reported a great quarter in which it beat on the top and bottom lines, and raised guidance, and yet shares are falling. The market appears to have...

Walgreens Boots Alliance Invests In Labor, Sales Rise

Walgreen's (NASDAQ: WBA) reported a great quarter in which it beat on the top and bottom lines, and raised guidance, and yet shares are falling. The market appears to have latched onto the company's increase in labor-related spending, what Walgreen's refers to as an investment in team members, and its potential impact on the bottom line.

While a concern, we are more impressed with the positive results posted for the quarter and the outlook for the rest of the year. Walgreen's is investing in team members and we like it because you have to have team members to have a team. We've seen this in the restaurant sector as well, where an investment in staff pays off because staffing the facility is like opening the floodgate to sales, revenue, and earnings.

"The strong start to the fiscal year reinforces our confidence in the future, and as a result, we are raising our guidance for the full year and increasing investments in our people," CEO Rosalind Brewer

Walgreens Boots Alliance Exceeds Expectations

Walgreens Boots Alliance turnaround plans have been gaining momentum in fits in starts but it looks like the efforts are gaining traction. The company reported $33.9 billion in net revenue for a gain of 7.4% over last year and beat the Marketbeat.com consensus by 280 basis points. The gain was driven by strength in all segments with notable strength in the core U.S. retail segment and Boots stores in the UK. US retail comps jumped 10.1% over last driven by an 88% increase in eCommerce and specifically same-day pickup. Vaccines and COVID-19 testing are also listed as drivers of growth.

Moving down the report, the company experienced significant margin expansion with operating income up nearly 50% on an adjusted basis. The GAAP earnings of $4.13 beat the Marketbeat.com consensus by more than $3.00 but there is a one-off factor in the previous year that resulted in a net loss for the period but underlying results are strong. On an adjusted basis, The $1.68 in reported earrings is up 53% from last year and beat the expectations by $0.34.

The best news is that the momentum is expected to continue into the current quarter at least. The company raised its EPS guidance for the full year for the second time in two quarters to a range of up single digits compared to the previous expectation for flat EPS and the Marketbeat.com consensus which projects a mid-single-digit decline. The guidance includes, notably, a 200 basis positive impact due to investment in team members that is offset by plans for additional team-member investment.

High-Yielding Walgreens Pulls Back To Support

Walgreens Boots Alliance is a high-yielding stock with a positive outlook for distribution growth as well as a turn-around story. The current payout is worth more than 3.5% in yield and it is a safe payout as well. The company has been increasing for the last 6 years at a 5% CAGR and is only paying out 40% of the consensus estimate that we know to be too low. In our view, investors should not only expect to see a 7th consecutive distribution increase later in the fiscal year but for it to be larger than history would suggest.

Shares of Walgreens Boots Alliance pulled back in the wake of the earnings news but we are viewing this as a buying opportunity. Price action fell more than 2.0% at the low of the day but buyers stepped in to show their support. The candle formed has a long lower shadow indicative of the support and above the top of the previous range. Price action may move sideways from here but we would expect it to form another base of support and begin moving higher by the middle of the year.