Digital Brands Group Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
March 31, 2022

There are 13 speakers on the call.

Operator

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Walgreens Boots Alliance Second Quarter 2022 Earnings Conference Call. Question and answer session. Thank you.

Operator

Tiffany Kanaga, Vice President, Global Investor Relations, you may begin.

Speaker 1

Good morning. Thank you for joining us for the Walgreens Boots Alliance earnings call for the Q2 of fiscal year 2022. I'm Tiffany Kanaga, Vice President of Global Investor Relations. Joining me on today's call are Ross Brewer, our Chief Executive Officer James Kehoe, our Chief Financial Officer and John Stanley, President of Walgreens. As always, during the conference call, we anticipate making We have a few questions regarding the call.

Speaker 1

I would like to turn the call over to Mr. President. Thank you, including those listed on Slide 2 and those outlined in our latest Forms 10 ks and 10 Q filed with the Securities and Exchange Commission. We undertake no obligation to publicly update any forward looking statement after this presentation, whether as a result of new information, future events, changes in assumptions or otherwise. You can find our press release and the slides referenced on this call in the Investors section of the Walgreens Boots Alliance website.

Speaker 1

The The slides in the press release also contain further information about non GAAP financial measures that we will discuss today during this call. I will now turn the call over to Rob.

Speaker 2

Thanks, Tiffany, and good morning, everyone. Walgreens Boots Alliance once again delivered strong results in the 2nd quarter. Sales increased 3.8% in constant currency or high single digits on a core basis, excluding the negative impact of AllianceRx Walgreens and the positive M and A activity in Walgreens Health. Adjusted EPS grew 26.5%. Our good performance reflects execution across each of our business segments.

Speaker 2

Our U. S. Retail sales comp of 14.7% was the highest in over 20 years, above even last quarter's record, and we are seeing significant recovery in our international markets. At the same time, we are building our next growth engine, Walgreens Health, which is on pace toward its long term target. And of course, we continue to serve communities With COVID testing and vaccinations to fight the pandemic.

Speaker 2

During the quarter, we also undertook important actions to advance our strategic priorities and to ensure our asset portfolio is strongly aligned. We initiated a review of the boots business and this process is progressing well. Looking ahead, we are maintaining our full year adjusted EPS guidance of low single digit growth, which we raised in January. Our outlook incorporates healthy fundamentals in our core business as demonstrated with robust sales and earnings growth year to date, balanced against ongoing investments in our growth initiatives and our people. We are delivering against our Investor Day commitments as laid out in October.

Speaker 2

We're moving quickly to execute our vision of consumer centric, technology enabled healthcare solutions, which extend well beyond the pharmacy walls. As we began to offer a care delivery experience that improves health outcomes and lowers costs for patients, Providers and payers, we are well positioned to drive accelerated sustainable value creation. Next, I want to take a moment to review Walgreens' initiatives to provide local communities with access to important resources during the pandemic and as we navigate the recovery into an endemic scenario. In the U. S, we administered 11,800,000 COVID-nineteen vaccinations within the quarter and over 62,000,000 to date.

Speaker 2

Our pharmacy team members are health care heroes. The majority of our patients and customers see their pharmacists more than they do any other health care provider, And we recognize their tireless dedication and contributions to the pandemic response. The Omicron wave in December January also drove Elevated levels of COVID testing both in store and at home. We completed 6,600,000 in store COVID tests during the quarter and over 27,000,000 to date. In addition to our drive through testing at no cost to patients, we've now launched convenient at home COVID PCR test collection kits with LabCorp at no cost nationwide.

Speaker 2

This is particularly important for uninsured, socially vulnerable and medically underserved populations who continue to be among those most impacted by COVID. And as we all start to resume normal activities, Walgreens will remain a partner to our communities to ensure safer connections and improved mobility. Our leadership in vaccines And testing is just one way that we are becoming the leading partner in reimagining local healthcare and well-being for all. The Q2 included significant progress towards each of our 4 strategic priorities. Let me update you on our latest initiatives and then spend a moment on the drivers of execution at Walgreens Health.

Speaker 2

First, we are transforming and aligning the core business and building a pharmacy of the future that will enable and support our healthcare strategy. We saw continued momentum online in the 2nd quarter with digital sales up 38% in the U. S. Or 116% on a 2 year stack basis. Same day pickup orders accelerated sequentially to 3,900,000 orders.

Speaker 2

We have also enrolled over 96,000,000 My Walgreens members, up nearly 11,000,000 1st. Additionally, our alternative profit streams are performing well, including our media advertising business, which launched a year ago and is running ahead of expectations. We continue to see digital media as a significant opportunity for us. Finally, we have 3 automated micro fulfillment centers open and are on pace to have 'twenty two by the end of Fiscal 'twenty four, driving significant efficiencies and cost savings over time. We expect these centers to ultimately cover 40% to 50% of prescriptions for pharmacy served, removing routine tasks and excess inventory from the local sites.

Speaker 2

2nd, we're building a platform of technology enabled healthcare solutions with the consumer in mind, which is well positioned to fuel our next phase of growth. Nearly half of our store footprint will have a healthcare touch point between our organic Walgreens Health Corners and the co located clinics with VillageMD. VillageMD has now opened 102 co located clinics And the rollout has accelerated to an average pace of one opening every 3 days for calendar year 2022. On the Health Corners front, we remain on pace to have 100 sites in operation by year end. 3rd, We are refocusing our portfolio and optimizing capital allocation.

Speaker 2

We continue to apply a rigorous strategic lens to our equity investments and explore all options to unlock value. Recently, we have gained full ownership of the AllianceRx Walgreens Business and our German wholesale JV, creating greater agility ahead. We have also announced the strategic review of our boots business. This process is progressing well, and we will pursue an outcome that maximizes value. Finally, we are building a diverse winning team that will underpin our strategic priorities.

Speaker 2

Our deep and experienced bench is executing our strong results today and implementing the bold steps necessary to drive growth ahead. We are making rapid progress towards building out Walgreens Health with a clear path to a run rate of more than $4,000,000,000 exiting fiscal year 2022, well on our way to our goal of $9,000,000,000 to $10,000,000,000 in sales by fiscal 2025. We will improve health outcomes and lower cost for payers and providers by delivering care through owned and partnered assets. The goal is to support the patient journey across the entire care continuum through omni channel solution. This is why you see these complementary assets spanning primary care through VillageMD, specialty pharmacy through Shield and post acute care through our pending CareCentrix investment.

Speaker 2

The health corners play an important role in addressing care gaps through our health advisors. Today, Blue Shield California and Clover members can walk in and have Access to clinical services like A1C testing, colorectal cancer screening and blood pressure monitoring. I'm particularly moved by stories of these patients receiving emotional support while navigating what can be an overwhelming and impersonal experience and U. S. Healthcare.

Speaker 2

Much like our pharmacists, our health advisors are becoming trusted neighborhood sources of education, recommendations and connections that can help our patients to better manage their wellness. This is a transformational process to become a leader and value based care as only Walgreens can do through our trusted customer relationships, local knowledge and deep data insights. We will leverage our strong footprint and independent standing to offer uniquely consumer centric solutions for our communities. We are executing on our vision today. Our partnership with VillageMD positions them to be one of the largest and most differentiated primary care providers in the U.

Speaker 2

S. The collaboration is a significant growth catalyst, driving 1,000 co located clinics across more than 30 markets by 2027. VillageMD is in 22 markets today, most recently expanding to Boston, Jacksonville and Tucson in February, Denver in January and San Antonio in December. VillageMD's care delivery model is highly scalable with attractive unit economics over time. Shields continues to rapidly expand its platform, representing specialty patients across more than 30 disease states with more than 70 health system partners nationwide.

Speaker 2

In November February, Shield Inc. New deals with 2 significant health with geographic reach in the Northwest and Northeast U. S. Importantly, WBA and Shields Are collaborating to identify instances where their networks intersect to combine Shield's operational expertise with WBA's robust nationwide pharmacy network. In our organic Walgreens Health business, we are pleased with the rollout of our health corners with Blue Shield California and Clover, where we are gathering tremendous insights.

Speaker 2

We are in the process of We're signing on incremental partners, and we will initiate the next wave of 9 health corners in California in April. We also continue to refine the consumer app, adding new features to increase access, engagement and convenience. Overall, we are tracking well against our key milestones for Walgreens Health and remain very excited about our growth potential. We are executing across our balanced plans for fiscal 2022 as we build a strong foundation for sustainable low teens EPS growth. We are reimagining healthcare and well-being for all with a clear path towards accelerated value creation.

Speaker 2

With that, I'll hand it over to James to provide more color on our results and our outlook.

Speaker 3

Thank you, Ross, and good morning. We had an excellent quarter with focused execution across all of our businesses. Adjusted EPS was $1.59 ahead of expectations and on a constant currency basis up 26% versus prior year. We continue to execute strongly in COVID vaccinations and testing. Our U.

Speaker 3

S. Retail comps were the highest in 20 years And our international markets continue to recover nicely. And we increased our investments to build out our Walgreens Health business with an Yes, in fact, up 5 percentage points in the quarter. Operating cash flow was $1,100,000,000 in the quarter with free cash flow of $669,000,000 And finally, we are maintaining our full year outlook of low single digit growth in adjusted EPS. Let's now look at the results in more detail.

Speaker 3

2nd quarter sales advanced 3.8% on a constant currency basis. Strong growth from Walgreens and the international segment and sales contributions from Walgreens Health more than offset a 5 70 basis point impact from the sales decline in AllianceRx Walgreens. Overall, if you exclude the negative impact from AllianceRx And the positive M and A activity in Walgreens Health, core sales growth was high single digits. Adjusted operating income increased 35.9% on a constant currency basis, driven by strong gross profit performance in both pharmacy and retail in the U. S.

Speaker 3

And a continued rebound in international sales and profitability. Adjusted EPS was $1.59 in the quarter, a constant currency increase of 26%, driven entirely by adjusted operating income. The result was held back by a higher tax rate, which reduced EPS growth by 15 percentage points. GAAP to EPS decreased impairment of minority investments as well as lapping a $191,000,000 gain on the parcel sale of our investment Year to date sales advanced 5.7 percent on a constant currency basis, including a 400 basis point negative impact from AllianceRx. Without this impact, year to date sales growth was 9.7%.

Speaker 3

Adjusted operating We have increased 42% on a constant currency basis, reflecting strong adjusted gross profit growth across pharmacy and retail in the U. S. And the continued rebound in international segment sales and profitability. Adjusted EPS advanced 39%. GAAP EPS increased by $4.54 to $5.15 reflecting a $2,500,000,000 after tax gain in the Q1 related to the valuation of our prior investments in VillageMD and earnings as well as lapping a $1,200,000,000 charge net of tax from the company's equity earnings in AmerisourceBergen in the year full period.

Speaker 3

Now let's move to the U. S. Segment. Sales increased 1.2% in the quarter With a strong performance from Walgreens, more than offsetting a 6 80 basis point headwind from a 43% sales decline in the Alliance ORX Specialty Business. Comparable sales advanced 9.5% in the quarter.

Speaker 3

Adjusted gross profit increased 13.7% with both pharmacy and retail growing in the low teens. Strong sales growth and favorable mix was only partially offset by lower reimbursement rates and higher shrink and distribution costs. Adjusted SG and A spend increased 8.3%, primarily due to investments relating to vaccinations and labor, partially offset by savings from the transformational cost management program. SG and A as a percentage of sales 120 basis points to 18.3 percent of sales, and this was almost entirely due to an adverse mix impact as a result of AllianceRx. Adjusted operating income growth of 37% was entirely due to strong gross profit performance.

Speaker 3

Now, let's look in more detail at U. S. Pharmacy. Pharmacy sales declined 3.3%, held back by a 9.1 percentage point negative impact from Alliance Rx. Comparable pharmacy sales were up 7.2%, while comp scripts increased 4.7%.

Speaker 3

With COVID-nineteen vaccinations accounting for 275 basis points of the script growth, We completed 11,800,000 COVID-nineteen vaccinations in the quarter and administered 6,600,000 COVID-nineteen test. Pharmacy benefited in the quarter from improved seasonal scripts as well as higher than expected flu immunizations. However, boots continue to be challenged by temporary operating hour reductions due to labor shortages and a surge of Omicron related absences. Pharmacy adjusted gross profit grew nicely Our strong sales growth at Walgreens and favorable profit mix more than offset reimbursement pressure. Turning next to our U.

Speaker 3

S. Retail business. Comp retail sales increased 14.7%, the highest increase in more than 20 years. Excluding tobacco, comps were up 15.7% with OTC test kits contributing approximately 6 90 basis points of growth. Compared to the Q2 of 20 2020 pre COVID levels, comp sales were up mid teens.

Speaker 3

We saw broad growth across all categories, led by a 43% growth in health and wellness, driven by at home COVID-nineteen tests and cough COVID-nineteen. Transactions were up 9.5% and discretionary categories performed well with personal care comp sales growing 9.7% and beauty growing 6.5%. While gross margin declined slightly, strong sales growth drove low teens growth earnings growth in gross profit. Turning next to the international segment. And as always, I'll talk to constant currency numbers.

Speaker 3

Sales increased 7.5% in the quarter, reflecting the ongoing recovery and strong execution across our retail portfolio, Particularly in Boots UK, where sales advanced 15%. Adjusted operating income was $226,000,000 in the quarter, up 60% versus prior year, led by sales growth and tight cost control. In Germany, the integration of the McKesson wholesale business is very much on track with operational synergy benefits running ahead of schedule. Let's now look in more detail at Boots UK. Comparable pharmacy sales increased 3.6%.

Speaker 3

Stronger demand for services contributed to the increase with sales up almost 75% year on year, benefiting from COVID-nineteen testing and vaccinations as well as new online healthcare services. Comp retail sales increased 22% despite the headwind created by the Omicron variant. This reflected strong commercial execution and a recovery from the strict restrictions in the comparable quarter. Market share strengthened across all categories with beauty performing particularly well. Boots.com sales declined in the quarter as footfall at our physical stores increased 52%.

Speaker 3

However, The boots.com business remains in a very strong position, with sales up 60% compared to the pre COVID levels. Turning next to Walgreens House. As mentioned last quarter, our majority investments in Shields and VillageMD closed on October 29 November 24, respectively. Segment sales were $527,000,000 in the quarter with $446,000,000 from VillageMD and $81,000,000 from Shield Health. Walgreens Health AOI was a loss of $77,000,000 in the quarter.

Speaker 3

Organic investments increased sequentially and accounted for $31,000,000 of the $77,000,000 operating loss. Investments at VillageMD More than offset the profit contribution from Shield Health and led to a $46,000,000 AOI loss from majority investments. Virgen B sales advanced 145 percent on a pro form a basis, and they are executing against the planned investments to grow the business and to quickly expand the clinic footprint. Shoes delivered a strong quarter. Pro form a sales growth was 63% with improved operating margins, driven by growth from new and recently signed contracts and from expanding our value added proposition with existing health system partners.

Speaker 3

Let's now look at some of Key metrics for Walgreens Health. We are on track to meet our December 2022 goal of 2,000,000 lives and more than 100 Walgreens headquarters with 47 already up and running. The next wave of 9 locations is scheduled to launch in California in April. The rollout of VillageMD continues with 94 co located clinics open at the end of The second quarter, up from 81 at the end of the Q1. As of today, we have 102 co located clinics open, is now at $2,200,000,000 given a delay in the closing of the CareCentrix investment.

Speaker 3

There are no changes to our underlying sales assumptions. And as you can see, VillageMD and Shields are delivering impressive growth with Co form a combined sales growth of 128% in the quarter. Turning next to cash flow. We generated $1,300,000,000 of free cash flow in the first half of the year, dollars 550,000,000 below prior year As a working capital impact of a decline in the AllianceRx Walgreens business, the year over year impact of COVID-nineteen related Government support and increased capital expenditures behind key growth initiatives, including the rollout of New automated micro fulfillment centers, the VillageMD footprint expansion and continued omni channel and digital investments. Turning now to full year guidance.

Speaker 3

We are maintaining our full year guidance of low single digit growth in adjusted EPS. We have, however, raised our estimates for the base business from 5% to 7% growth to 6% to 8% growth to reflect strong U. S. Front of store performance and increased testing revenue. This upside is being reinvested in building out our healthcare business, which now represents an estimated 5 percentage point headwind to EPS growth compared to 4 percentage points previously.

Speaker 3

In summary, we are confirming our full year EPS guidance of low single digit growth, and I would remind you But this is better than our original guidance provided at the start of the fiscal year. With that, Let me now pass it back to Ross for her closing comments.

Speaker 2

Thank you, James. Let me be brief so we can take as many questions as We are executing well with another strong quarter, marking another step in our transformation. We are making significant progress across our strategic priorities. Our team members continue to amaze me with their dedication and talent as I visit many of our stores and offices across our regions. It's because of their hard work that Walgreens Boots Alliance has been With recent honors such as being named Fast Companies list of the world's 50 Most Innovative Companies and Times 100 Most Influential Companies.

Speaker 2

Our team members in particular provide me with deep conviction That we have what it takes to truly reimagine healthcare and well-being for all and deliver long term value creation. Now, I would like to open the line for questions. Operator?

Operator

Thank you. Our first question is from Lisa Gill with JPMorgan. Your line is open.

Speaker 4

Thanks very much and thanks for all the comments. First, I just wanted to start, James, with your comment that you said the quarter was ahead of your expectations. But when I think about The next several quarters, were there things that were pulled forward into this quarter, would be my first question? And How are you thinking? You made a comment about testing.

Speaker 4

I would assume testing was very strong in January February, but what have you seen more recently when we think about Your higher revenue due to testing, is that just because of what you saw in the most recent quarter or expectations going forward?

Speaker 5

Yes. Hi. So no, when we I made the comment about ahead of expectations, I believe we're maybe $0.20 ahead of consensus. But versus our internal forecast, we were about $0.08 ahead. And where we saw continued buoyancy Was on retail.

Speaker 5

Front of store had continued, particularly in the 1st 2 months of the quarter. And then secondly, on testing, as Omicron was peaking. So they were the 2 items that So our beat versus our internal forecast, which I said was about $0.08 Now we've seen a fairly I think we've seen a slowdown obviously since then and maybe I'll pass it over to John Stanley for a couple of comments on what he's seeing currently.

Speaker 6

Well, I guess the probably the big news there really is just we did start vaccinating the 4th shot yesterday. So What was slowing down has kind of picked up a bit here in the last 24 hours as far as the vaccine goes. I think on the testing, It did slow down as we came through the holidays in January into February and now into March. But there is a there has been a still a steady business there for travel and those people still meeting to test. So, down quite a bit, but a nice steady stream still ongoing.

Speaker 4

Hey, and Sean, just as a follow-up, we hear pharmacists as a provider and I know you've been a big proponent of this and we absolutely agree that Throughout the pandemic that the pharmacists have been on the frontline. But what does that really mean? Does that change reimbursement? Does it change their role When we think about them from a healthcare perspective?

Speaker 6

Yes, it's pretty important point. And We did I know Ross was in BC a couple of days ago. We did get a piece of legislation moving here just in the last week. That's the Equitable Pharmacist Access Bill. And that's a really around provider access and our ability to bill under Medicare Part B for services around testing and treating Influenza, strep and things like that.

Speaker 6

And I really think that's a pretty sizable addressable market today. That's honestly largely moved out of Primary care physicians anyway and gone into convenient care, but it's I think it just there's a real opportunity in our business to have a really convenient solution. We provide access obviously close to 9,000 locations. And I think our pharmacists and our technicians are more than capable as we've I've shown during the pandemic of delivering these kinds of services, that's a pretty big game changer if we can gain access to that market and in terms of How we grow our business and in terms of the value we can provide in the communities we serve.

Speaker 4

Great. Thank you.

Operator

Our next question is from Steven Valiquette with Barclays. Your line is open.

Speaker 7

Thanks. Good morning, everyone. So just regarding the boots business and the ongoing strategic review of that asset, just a A couple of interrelated questions. First, can you remind us where this asset stands at the moment, just on how much the profitability in fiscal 'twenty two is impaired by COVID versus the pre COVID baseline. And if I missed this, are you able to disclose how much of the international segment operating profit $226,000,000 this quarter is specifically related to the Boots asset that's under strategic review.

Speaker 7

Thanks.

Speaker 2

James, I'll turn that one over to you on boots.

Speaker 3

I'll just take the last part of your

Speaker 5

Question first, the revenue is Germany And Germany doesn't make very much money. It's a wholesale business. It's driving a lot of favorable synergies in the go forward position. But right now, It's only marginally profitable. So you could presume that the majority of the profitability in the international segment is related to the U.

Speaker 5

K. Business. I'm sorry, the first part of your question?

Speaker 6

Yes. You might have alluded to

Speaker 7

this a little bit during the prepared remarks. But as we think about just the profitability of that segment in fiscal 'twenty two, where does it stand with the profitability on pre COVID Baselines, are we well above? Are we still below? Are we kind of in line? Just any rough percentage around that might be helpful just to frame it.

Speaker 7

Thanks.

Speaker 5

No, I think we're still quite a A bit below, call it, the 2 or 3 year stacks. Foot traffic hasn't fully recovered in the UK. I think it's like 15% below Well, it was 2 years ago, just in terms of foot traffic. The UK reacted, so they first of all, they had a fabulous quarter given that they had A big spike in Omicron in the quarter and it's a very foot traffic driven business and the traffic shifts really quickly. So look at the quarter they just had and foot traffic was actually up 52%, but it still remains about 15% below where it was 2 years ago, Right.

Speaker 5

So it hasn't fully recovered. And I think if you cycle back a couple of conference calls, what we said was, we I expect the Boots UK business to broadly get back to the pre COVID levels when they're exiting 2022. I would say that if you actually looked at it on a sales basis, it will be 2023 year before boots fully gets back to pre COVID levels. So there's a lot of good growth ahead in the UK and international segment driven by that. They've done a spectacular job on cost control.

Speaker 5

And then secondly, the other part that I don't think we get credit for is boots.com in the UK. That's 60% growth on a 2 year stack basis. And I don't think there's many retailers in the UK that have a boots.com business That represents 15% of sales. So this is a business that used COVID as a time to reinvent itself And exit much, much more strongly than it went into COVID. So this is a business with massive momentum, it's well positioned for the future, has a large and fast growing.combusiness.

Speaker 5

So we're very happy with it.

Speaker 3

But as I said, your question is

Speaker 5

a good one. It won't fully recover Although fiscal year 'twenty three, so there's a lot of positive growth ahead.

Speaker 7

Okay. That's very helpful. Thanks.

Speaker 3

Thank you. Thanks.

Operator

The next question is from Elizabeth Anderson with Evercore.

Speaker 8

In terms of you talked about sort of reinvesting in the healthcare business when you were talking about the components of the 2nd half EPS numbers. 1, could you talk about sort of where those what those increased Investments are? And then 2, can you talk about your sort of where you're seeing labor costs come in versus your expectations? I know that you sort of Pointed to that as a driver of SG and A and obviously it's well known that costs are coming up. I just wanted to understand sort of how that's trending as we move through the fiscal year.

Speaker 8

Thanks.

Speaker 2

Elizabeth, thanks for the question. I'll start off with Walgreens Health and then I'll ask members of the team to join in. But from a Walgreens Health perspective, we continue to invest. As you all know, we made the investments in VillageMD, CareCentrix and Shields, we're pleased with where we are with those investments and we're integrating where it makes expense in our healthcare continuum. So that work is ongoing and we're satisfied in that respect.

Speaker 2

We did mention when we were at our Investors Day Back in October that we would continue to invest in the business and we'll continue to do that. And I will Also mentioned that we're seeing really good performance, particularly in our specialty pharmacy area With shields and so that would be ongoing. I'm going to ask James to talk with any further detail on Walgreens Health with the investments. And then John, if you could take it from there.

Speaker 5

Yes. Just quickly, Elizabeth. Basically, what we said is we Why do we maintain guidance? We took up guidance on the base business and we increased the investment on healthcare From 4 percentage points of EPS to 5 percentage points. And one is to send a clear message that we're serious and we're making strong progress.

Speaker 5

And as we're in the second half of the year, there's a fairly big shift between first half and second half. Second half is about 7% of each EPS headwinds coming from the investments in healthcare. Specifically, what were we doing? We've increased slightly and VillageMD has increased slightly its investments behind the opening of the co located clinics. You can recall in the last conference call, we raised the guidance for the full year from 160 clinics We're cutting the year to $200,000,000 And now we're just aligning a bit the expenses and the phasing of those rollouts.

Speaker 5

So Probably is a longer term positive than we're just readjusting expenses in the short term. The other thing is We're really doubling down on the organic investments to meet the requirements of Blue Shield California and Clover. We're making strong progress against both of those. So call it a reinforcement of expenses exiting the year because We're a resident here. We want to exit the year stronger than when we entered.

Speaker 5

So this is all about investing in the future growth of the company. And John, maybe pass it over to you on the labor question.

Speaker 6

Yes, I think I'd just make a couple of comments. One, I'm really excited about The investments that we're making in the Walgreens business, we're really deep into our micro fulfillment strategy and rollout. And as we've talked about previously, this is really a Program we're rolling out to support our pharmacists and get work out of our store and free up team member time to really provide additional services in the pharmacy. So I'm really excited about that investment and the progress that we're making there. And we touched on with Lisa earlier about some of the potential value drivers there.

Speaker 6

I There's just a lot of upside there for us in the future. So super excited about that. And there's other investments that we're making in the business in addition to that around pharmacy with automation in our call centers and things like that to improve the experience and take all their work out of the stores and out of the pharmacy. On the labor side, as we talked about over several quarters, we have made Some really significant investments here. We raised our starting wage across the company to $13 last fall and we moved up to $15 in the fall of 'twenty three.

Speaker 6

And We had also made changes to our tech starting wages went to 15% in the fall into 16.50% this coming fall. And I think we talked about where we were with some investments. Last quarter, we had about $120,000,000 of investments that we've made For wage premiums and hard to staff areas with pharmacists as well as recognition bonuses that we paid to really recognize our team members for really the hard work and dedication that they've shown here through the pandemic. And I think as we look forward on where we are versus our expectations Related to all of that, I think we included in our updated guidance here about $40,000,000 of additional expense in the back half of the year. So pretty close to what we expected.

Operator

Next question is from A. J. Rice with Credit Suisse. Your line is open.

Speaker 9

Hi, everybody. Thanks for the question. I wondered, obviously, you're rolling out at a nice pace, both the health centers, The Walgreens Health Centers as well as the Village MC and you've got a number of them that are co located. I wonder if you could if it's possible to start to talk or Provide a little more information on how that is impacting the retail operations. Can you point to increased script volume or Increased foot traffic in the front end that you can attribute to either the co located VillageMD or the health centers, how that's changed in the profile of the stores on those ones that have the co located offerings.

Speaker 2

Thank you, A. J. For that question. So first of all, it's still early days For us in terms of the number of VillageMD clinics and to see that transfer of script volume over to the stores, what's more important here is that just to remind everyone that this is The primary care physician practice and what we're really building are key relationships, the relationship with the consumer between the primary care physician and the pharmacist. And that's where we're seeing the greatest uptick right now is in patient satisfaction and access to Healthcare in neighborhood markets.

Speaker 2

And so we'll continue to look at this and look at Script uplift, but right now the focus is really on gaining the confidence and creating new relationships in the marketplace. The other thing I will tell you is, as we see these expand across the U. S, I will tell you, after having walked Several of them and watch the patient feedback. It's comforting to see just how much engagement we're getting with the patient. And Also too, it's actually great for our pharmacists because they are much more engaged with the patient and the customer because they have the information coming over directly from the primary care physician's office just inside the building.

Speaker 2

So We'll continue to update you as we see those numbers come in from script count growth, but it's still a little bit too early for that.

Speaker 5

Yes. Just to add into that, Just to give you some perspective, I want to clarify. You'll see 2 benefits as we go forward. One is we're absolutely convinced on script up mix. We're just not providing the number on a quarterly basis, and we'll do a more comprehensive update in the future.

Speaker 5

So you're the one not to underestimate, and this is more an impact on Villages performances, they have a lot of older practices where a pharmacist and a doctor together managing a patient Deliver lower medical costs than just a primary care physician by themselves. So the other big hypothesis that has to play out in the co located stores is the combined effort of a pharmacist together with a primary care physician In managing down the cost of healthcare over time. And as I said, they have strong evidence on their standalone clinics, And that will translate over time to improved health performance on the clinics they've co located with us. So there's a bunch of KPIs we're watching very, very closely. But bear in mind, it takes 2 years for a clinic to get up to a kind of a reasonable level of operations So and achieve a breakeven.

Speaker 5

So it does take time for the statistics to come through, but we're absolutely convinced that both of these will be in great territory over the coming A year or 2.

Speaker 9

Okay. Thanks a lot. That was very interesting. The

Operator

The next question is from Charles Rhyee with Cowen. Your line is open.

Speaker 10

Thanks for taking the question. Maybe I want to ask, as you're you previously kind of talked about that in addition to Blue Shield California and Clover that you're engaging With a number of interested parties to get to the 2,000,000 lives goal by the end of this year, can you kind of give a sense of what type of So who you're speaking with and kind of characterize where you are in those discussions and perhaps how close you might be to signing some?

Speaker 2

Yes. So Dave, thanks for that question. So we had committed that we would have 5 significant relationships by the end of the year. And I will tell you that we have 2 of those, 1 in Blue Shield of California and then the other one with Clover. There's a third one that We've just recently signed and we'll be announcing shortly here.

Speaker 2

So we feel like we're on a really good track record here in terms of How we are looking at these entities and moving them forward. The other significant piece is that we are adding Health Corners Out in California to support the current relationships with Blue Shield of California and also with Clover. So we've got more of the Health Corners coming on. And Just as a reminder, those Health Corners, they are becoming the health advisors in the community and provide something on top of when you think about the work We're doing with VillageMD. So we are encouraged and really aggressive in developing these relationships.

Speaker 2

And we have a commercial team that is working alongside to make sure that these come online and then we do the work that we need to do to bring the health corners Up to speed to support them. So we will hit the 5 contracts that we talked about at the beginning of the year.

Speaker 10

Great. Appreciate that. And just a follow-up, if we think about the work you did with Health Corners, the partnership with Blue Shield, VillageMD, Clearly, we saw with COVID testing, a real rise in people doing at home testing. Have you thought about the role of At home Diagnostics has and how that would fit within sort of the Walgreens Health business that you're building?

Speaker 2

Yes. We learned a lot during the COVID testing process. And I think we talked earlier about the work we're doing LabCorp to provide at home COVID test. So it's giving us a real bright light into what more we can do in this I know that John Stanley's team is developing, a lot of the work around diagnostics and at home testing through our retail business. I don't know, John, if you wanted to add anything more to that question.

Speaker 6

No, I do think it's Big opportunity and an excellent way for us to engage with our chronic patients to help them manage their disease state. So I think there's Plenty of good upside here and more of these types of tests are becoming available all the time. So we are working closely with a lot of pharma and manufacturers to try and gain access to those capabilities as they come to market.

Speaker 2

The only other thing I would add to that too is that You know the discussion earlier around being able to test and treat in our stores, it's not only against the COVID virus, but it's also just imagine if there's a Strep throat diagnosis, our pharmacists hopefully will be able to test that in store, which we currently do, and then treat and send the patient home. And so While that's not in home testing, it is creating an opportunity for the patient to take care of themselves and recover it in a home setting.

Speaker 3

That's helpful. Thank you.

Operator

The next question is from Brian Tanquilut with Jefferies. Your line is open.

Speaker 11

Hey, good morning and thanks for taking the question. It's Jack Sullivan on for Brian. I just want to look at the 'twenty two guidance and And really use that and where we stand with the back half of the year as a jumping off point to look at 'twenty three. So when you look at what you're implying with the guidance and Acknowledging that it sounds like there's some upside maybe from 4th boosters or 4th shots, but at the higher end of the guidance It's about $1.79 of EPS in the back half of the year. Historically, you've done roughly 50% or a little bit lower than 50% of your EPS in the back half of your fiscal year.

Speaker 11

So when I bridge from, call it, dollars 3.60 to $3.70 of EPS that's implied on a full year Just from that back half guide, can you just help me look at the back half of this year bridging to that $5.15 of EPS that you sort of put a stake in the ground around that at Investor Day and how we get there based on back half performance. Thanks.

Speaker 2

So Jack, let me start off by, I'm going to start really talking about 'twenty three And then any specifics on the second half of the year and the guidance that we've already provided, maybe this will I appreciate a broader discussion for us. But first of all, we're not providing any guidance for Fiscal year 'twenty three. But we are exiting the year with a real position of strength. We're executing on what we said we would do, including The raising of our fiscal 'twenty two guidance that we did just not too long ago. You'll see a few things in the numbers Here, we indicated that we would make some strategic moves here and make some further investments.

Speaker 2

But we're really positioned in 'twenty three to continue to deliver on our Walgreens Health investments. When you think about it, the Growth in Walgreens Health is about 125% in the quarter. We'll hit a $4,000,000,000 run rate level of sales as we exit the year. And we still have long term plans to hit a $9,000,000,000 to $10,000,000,000 number in 2025. But the one thing I do want to mention is around if you look at the fiscal 'twenty two guidance, There's some additional detail in there.

Speaker 2

We had incremental people investments in pharmacy around $158,000,000 That's roughly about $0.14 of EPS above our October guidance. We had minimum wage increases in the October guidance. And with just looking at that, that's about a 2% EPS headwind in the second half of the year. We also just looking at inflation, inflation is on the rise, so we expect to pass through most of that and inflationary impacts And some impacts in the short term also. So when you look at this, I just want to summarize that we're not going to We gave guidance for 2023.

Speaker 2

We came out of the quarter strong and we're managing through the second half. James, anything you want to add on the second half?

Speaker 5

Yes, Jack. I think as you look to it, We said before, versus our internal estimates, we beat in the Q2 by about 8%, so we're reinvesting that. We believe we've got a bunch of exciting growth opportunities, particularly in Walgreens Zone that we don't fund exiting the year. But I think as you look in the second half, bear in mind a couple of things is, and I'm going to give you two numbers. It's the EPS growth in Q3 and Q4 of last year.

Speaker 5

So in Q3, which was the peak of vaccinations, we grew EPS 97%. That's a pretty that's what we're cycling through. In Q4, we grew 26%. So the average is somewhere in there in the 60% range. So a little more precise.

Speaker 5

And I think it shouldn't really come as a surprise to most of you on the phone. If you've done the math on vaccinations and the contribution last year, What we're facing in the second half of the year is we're lapping vaccinations and our best estimate of that is around a 20% headwind in the second half. So It's almost not. The second part is the labor investments that John mentioned before, 5 percentage points and the last one is Walgreens Health So the Walgreens have been signaled well in advance. The vaccinations, we all knew about what we delivered last year.

Speaker 5

And the only real new news in the second half is this 5% of labor investments. Nothing said. I don't want to go out and say the guidance is conservative, but we haven't factor in the impact of the 4th shot for the over 50s. We're still assessing how much that is worth. Could it be $2,000,000 $3,000,000 $4,000,000 vaccines?

Speaker 5

It's probably in the midpoint, maybe $3,000,000 So is there $0.05 to $0.08 of upside there? Yes, there probably is. But between now and the end of the year, a Stuff can change. Things I'm excited about, though, I recently went through a review on inflation. We have basically All the inflationary impacts and that includes a massive increase in the cost of international ocean freight, which is one of the biggest headaches for most retailers right now.

Speaker 5

So we're sitting in a fairly decent position with regards to inflation. We think our model will work and We're looking forward and quite optimistic about the future. The front of stores had a spectacular year. Okay, we've had a Fair amount of assistance from the BinaxNOW OPC test, but we over delivered there and we executed very strongly. Maybe, John, you could give some insight into the front of store plans we have on own brands and other areas into next year.

Speaker 5

So We're quite excited, Jack, as we look forward into 'twenty three, but we're not getting into the game of giving 'twenty three guidance on every conference call.

Speaker 6

Sure. Yes. I'll just pick that up. I mean,

Speaker 11

I think a couple of things.

Speaker 6

We're obviously, we've talked Some about my Walgreens and mass personalization, I think we've done a great job here. We have a lot of upside are with our program here and kind of where we're going between that program and the Walgreens advertising group and the different things that we're working on there. So So I think just from an omni channel experience, some of the capabilities we've built and where we can go here over the next couple of years, I think a lot of potential an exciting upside for us. As James mentioned, we're very focused on own brand. We think we have an opportunity to expand in In additional categories in the store, but also developed in existing categories, the own brand offering, and we're making some good investments there in terms of how we go to market and how we position it within the store.

Speaker 6

We're pretty excited about the things that we're doing there. And then I think we've talked a little bit about the fact that we are taking a very careful look And a lot of our merchandising and where we're going for the future inside the box from a front end perspective. So we look at that. There hasn't probably been a full store reset in most of these stores, maybe ever since they were built. So So we have a pretty big, we think, merchandising opportunity ahead of us on the front end as well.

Speaker 6

So it would just be a couple of things, James, I'd call out.

Operator

The next question is from George Hill with Deutsche Bank. Your line is open.

Speaker 12

Hey, good morning guys and thanks for taking the question. And I guess I was going to ask another question about Walgreens Health. If If I look at the presentation versus the prior quarter, it looks like you guys are ratcheting back full year revenue expectations pretty sharply despite increasing The number of co located clients, I was wondering if

Speaker 5

you could just put a

Speaker 12

little more color around the expectations there and kind of what's driving the revision?

Speaker 5

Yes. We should have probably cut and made up here. It's only due to CareCentric. We've had some regulatory follow-up questions. And the closing we previously assumed would be in the section at the end of the previous quarter.

Speaker 5

So we're just delayed in terms of closing. There's absolutely no impact on long term projections here. I would actually say quite the opposite. Just look at the pro form a sales growth that we're seeing on the 2 businesses, Skinny MG growing 145% And Shields, which is actually a more mature business even than Finogen B growing at 63%. So, Shields is probably substantially ahead of the original plan we have in mind and Village is very much on track.

Speaker 5

And We can't get involved in anything CareCentrix is doing right now because the acquisition hasn't closed, but our understanding is they're doing Quite well as well. And so we're actually really excited because this pro form a sales growth in any business of 128%. That's why we're investing, exiting the year. We'll be going in next year with a $4,000,000,000 plus run rate company with a target within 3 years To be up $10,000,000,000 approaching $10,000,000,000 The more we get our arms around this and the more we get into it, the more we're convinced These are very easily achievable targets.

Operator

That will conclude UDR question and answer session. I'll turn the call over to Ross Brewer for any closing remarks.

Speaker 2

So thanks everyone for your time and your interest and WBA. I'm really glad we were able to take several questions today and cover a range of topics, including The continued success we're seeing in our core business, particularly vaccinations and testing. I think you've recognized the momentum in our international segment, Our significant progress in our healthcare business and also to new ways that we're serving our patients and our customers even further. So we're really pleased that you recognize that. I couldn't be more excited about where we're heading right now.

Speaker 2

And we're pleased that the great work of our teams can be seen in our strong quarter. We'll continue to execute well across our strategic priorities and keep you up to date on those. But we're really confident in our actions and the Plans that we have to exit fiscal 2022 and in a position of strength, much stronger than before the pandemic, Which was our plan all along. So as we build our growth engine and really try and drive the sustainable value We've been talking about, we'll keep you posted. We've got work ahead of us, but we're encouraged and excited.

Speaker 2

So thank you and talk to you again real soon.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.

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Earnings Conference Call
Digital Brands Group Q2 2022
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