Amazon threat overshadows Walgreens' solid quarter earnings

Talk about crummy timing.

Walgreens Boots Alliance on Thursday reported third-quarter earnings that jumped more than 15 percent, beating Wall Street expectations. It also raised the bottom end of its fiscal 2018 earnings forecast, increased its quarterly dividend and announced a $10 billion stock buyback—and yet its stock was down more than 9 percent this afternoon to around $60 a share, flirting with a new 52-week low.

That's because Amazon chose the same day to make its own announcement: The e-commerce giant is buying PillPack, an online pharmacy that delivers prescriptions pre-sorted by the dose.

On Walgreens' earnings call today, CEO Stefano Pessina said he was unfazed, a position he's maintained since rumors of Amazon's entry into the drug business picked up steam last fall.

"It is a declaration of intent from Amazon," yes, but "pharmacy work is much more complex than just delivering certain pills or certain packages," he said.

Pessina also flicked at the fact that Walgreens is working on improving its own "level of services." (A Walgreens spokesman clarified to Crain's that he was referring to both improved online and in-store pharmacy options, and better interplay between the two.)

Later, Pessina elaborated, noting that Walgreens' local stores set it apart from an online juggernaut: "We are developing our omnichannel offering and working on our plan for our U.S. stores, to create hubs in the communities that we serve with an attractive range of services and products," he said. "We remain convinced about the value of our presence in the community."

At least one analyst wasn't soothed by Pessina's confidence.

"Amazon has entered the complex and the wall of worry is now like a scene from 'Game of Thrones,'" Ross Muken of Evercore ISI wrote in a note to investors.

In fact, this anxiety isn't new. While today's stock price freefall puts Walgreens on track for its largest one-day drop since August 2014, when shares closed down more than 14 percent after the company said it would not pursue an overseas headquarters relocation, the stock also was battered by Amazon fear last year. It fell nearly 11 percent over seven trading days in mid-October after an analyst report suggested Amazon would enter the pharmacy market.

Walgreens wasn't the only stock to tank on the Amazon news today. Shares of CVS were down more than 6 percent this afternoon, while those of two companies with which Walgreens partners—drug distributor AmerisourceBergen and pharmacy benefits manager Express Scripts—also tumbled.

Muken also saw other reasons for concern beyond Amazon's looming shadow. Most notably: Walgreens' disciplined cost containment is more responsible for the solid earnings than its mediocre underlying business results.

Walgreens continues "to see challenging international market conditions," he wrote, noting that same-store sales in the company's international pharmacy division declined 1.3 percent. Boots' U.K. stores saw a 2.1 percent drop.

Moreover, the company's wholesale drug sales were behind estimates, and sales from Walgreens' U.S. pharmacies were flat.

Pessina, who has long signaled interest in mergers and acquisitions, said he would not be pushed into a deal as an "emotional" response to the Amazon threat—but repeated he's always open to "M&A at the right price."

"We are not complacent," the Italian billionaire said on the earnings call. "I repeat this. We have a clear plan. And I believe that we will continue with the execution of our plan...Our task is to stay relevant."

As countless companies in other Amazon-adjacent industries have already learned, that task just got tougher.

"Amazon threat overshadows Walgreens' solid quarter" originally appeared in Crain's Chicago Business.