What To Make Of The Walgreens And FedEx Partnership
Summary
- The two companies announced a joint partnership.
- I discuss the implications of the new co-located services.
- I revisit performance data and opine on the key indicator we need to watch for both companies.
When FedEx Corp. (NYSE:NYSE:FDX) pulled back heavily in June, I noted this as a buying opportunity. It is important to note that when I first opined on the name, I thought it was a strong company that was a touch too expensive. I also thought it should raise its dividend, and of course, it did recently raise the payout 60%. The company had been firing on all cylinders, but FedEx recently ran into an unexpected hiccup with its earnings. That said, the company has been out competed by UPS (UPS) in terms of its location services for pickup/dropoff locations. Just today, however, we learned that the company was taking steps to take back market share against UPS, which has substantially more of these locations nationwide. Beginning this year as a pilot and then rolling out to mass amounts of stores, FedEx will have locations located within Walgreens (NASDAQ:WBA). The move is a win for FedEx, and for WBA.
This partnership will add thousands of pickup and dropoff locations. It has two benefits. First, customers will have more convenience and more locations with which to do business with FedEx. This means they may be more likely to use the service over UPS, and if their pharmacy provider is Walgreens, then it becomes one stop shopping. While the exact costs to operate these services are unclear, the benefits are clear, provided they are cost efficient. For Walgreens, increased foot traffic should provide a bump to retail sales. That is a win. For FedEx, making the service more convenient will help take share from UPS. While FedEx and Walgreens have both performed well of late, performance can always be improved. This is especially true for FedEx, which struggled recently.
What do I mean? In its recent quarter, revenue was $14.9 billion, rising 19.2% year over year and meeting estimates. That is a positive. On a GAAP basis, reported earnings were $2.59 for the first quarter compared to $2.44 per diluted share last year, so that is strong improvement. Of course, we need to consider adjustments when comparing year over year and as such adjusted operating income rose slight year over year to $1.23 billion. Adjusted earnings were $2.80 per share, rising from $2.58 last year. However, this missed estimates by $0.10. That hurt the name, which had been firing on all cylinders.
It is also worth noting that part of the reason the company saw a large increase on a per-share basis was due to buybacks. However, the company has also been watching expenses and has seen continued positive impacts from these profit improvement program initiatives. With the new in Walgreen's services, costs will be the major question mark. Rising expenses hit margins hard last quarter, and may be an issue in 2017, despite impressive segment specific results. Let us not forget that FedEx is already slated to see rising costs from the integration of TNT Express and the Outlook restructuring program. That said we can expected earnings of $11.85 to $12.35 per share with capital spending of $5.1 billion.
As for Walgreens, this name is trying to close a deal with Rite Aid (RAD). That deal looks like it will close this month, according to a column in the NY Post. This new move with FedEx really highlights a transformational year. The thing about Walgreens Boots Alliance is that this company is the first global pharmacy-led, health and well-being enterprise in the world. Now it is seeking to become more of a one-stop shop for customers. I have been impressed with all of the areas this company is involved in. It is now an extremely well diversified machine. But the stock has been kind of in neutral for a bit, mostly trading sideways. With the addition of Rite Aid and FedEx services, this could be the jolt the company needs, even though earnings continue to slowly improve.
This is evidenced in the recently released fiscal Q1 earnings. On a GAAP basis, net earnings for the fiscal first quarter dropped 5% to $1.1 billion compared with the same quarter a year ago, while GAAP net earnings per diluted share dropped 4% to $0.97 compared with the same quarter a year ago. We hate to see this trend, even if unadjusted. Adjusted earnings are the basis for most analyst estimates, and factoring in some necessary items, adjusted fiscal 2017 first quarter net earnings jumped 6.1% to $123 billion and spiked 6.8% on a per share basis to $1.10. Net sales in the quarter dropped 1.8% to $28.5 billion compared with the same quarter a year ago, largely due to currency issues. In constant dollars, sales were actually up 1.1%. However, with the addition of Rite Aid and now FedEx synergistic sales are expected to continue to grow for the company in 2017 and beyond.
Take home? The news is bullish for both companies. Although in very different sectors, I like Walgreens here a bit more than FedEx, but am also bullish on FedEx. What we need to watch for both companies are expenses, particularly for FedEx operating these new locations, and for Walgreens, how much they will be spending with Rite Aid integration, in addition to whatever costs are incurred hosting the FedEx locations.
Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time-sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."
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