Walgreens profit up as attention turns to Rite Aid deal

The parent company of pharmacy giant Walgreens posted increases in sales and profit in its fiscal fourth quarter as attention turns to the financial benefits and regulatory risk of the company's pending acquisition of U.S. rival Rite Aid.

Walgreens Boots Alliance reported net earnings of $26 million for the fourth quarter ended Aug. 31 and $4.2 billion for the full year — compared to a $221 million loss in the fiscal fourth quarter of 2014 and a $1.9 billion profit for all of 2014. But last year's numbers did not include the results of the company's acquisition of European chain Alliance Boots, which was completed on Dec. 31, skewing the comparison.

Meanwhile, investors are weighing the impact of Walgreens' deal to acquire Rite Aid for $9.4 billion, or $17.2 billion when including the assumption of debt. The deal would combine the nation's second- and third-largest drug-store chains by market share, behind only fierce rival CVS Health.

On a conference call, Walgreens CEO Stefano Pessina declined to assess the risk that U.S. regulators will deny the deal or force the newly combined company to sell any of the approximately 13,000 stores they collectively operate.

"We are not speculating at all" about the number of stores the new company will retain, he said.

But Credit Suisse analyst Edward Kelly estimated that the Federal Trade Commission could force the combined company to shed anywhere from 150 to 400 stores depending on the agency's threshold for acceptable market dominance.

Historically, he said in a research note, pharmacies making acquisitions have been forced to sell stores in areas where they would otherwise control 50% market-share of cash-paying customers.

The tieup would turn the U.S. drug-store market into a "duopoly" and hasten the transformation of the pharmacy giants into a providers of basic health care services, IBISWorld analyst Sarah Turk said in a research report.

The deal, which must win approval from regulators, would give the companies bargaining leverage against drug companies and generate $1 billion in savings, Walgreens said.

That figure exceeding Credit Suisse analyst Kelly's expectations. He lauded the "strategically compelling" deal, which he said "for years seemed inevitable."

CEO Pessina said that those savings would come primarily from "internal efficiency" and "a better network to sell our brands."

But he was guarded about revealing details of the company's plans for Rite Aid, whose strong presence in the eastern U.S. was enticing for Walgreens. "For a few months we will not be able to tell you where we want to go next," he said.

Rite Aid is expected to maintain its brand name for now, though Walgreens said that could change. Analysts cautioned against sharp changes to Rite Aid's strategy of offering private-label brands and focusing on its customer loyalty program.

One possibility is a campaign to overhaul store interiors. Only about 30% to 35% of Rite Aid's 4,500 stores have been renovated in recent years, "with the remaining stores requiring a substantial amount of resources to remodel and improve operations," S&P Capital IQ analysts said in a research note.

To be sure, though, the rapidly changing health care market was the key driver in the consolidation.

IBISWorld's Turk said that with the increasing complexity of pharmaceutical treatments requiring specialists to provide guidance to patients, the combined Walgreens and Rite Aid will be better positioned to serve customers and manage costs.

It's difficult for the mom-and-pop pharmacies of days gone by to survive the brutally competitive world of drug price negotiations, insurance reimbursement and federal health care standards. Bigger drug store chains have more leverage in the negotiating game.

Walgreens is already one of the biggest players. The company filled 894 million prescriptions in the fiscal year ending Aug. 31, up 4%.

The company's sales rose from $19.1 billion in the fourth quarter of 2014 to $28.5 billion in the fourth quarter of 2015 when including the Alliance Boots numbers. Full-year sales rose from $76.4 billion to $103.4 billion.

Perhaps more insightful is the sales performance at Walgreens stores open at least a year. U.S. same-store sales rose 6.4% for the fiscal year and 6.5% for the fourth quarter as the company's pharmacies gained market share in prescriptions.

Walgreens' U.S. drug-store division had sales of $81 billion for the year, up 6%, and $19.9 billion for the quarter, up 4.7%. The company operated 8,173 stores in the U.S. as of Aug. 31, down 34 from a year earlier.

The company's foreign pharmacy division, which runs 4,582 stores in eight countries, recorded same-store sales growth of 3.6% for the year and 4.3% for the quarter.

Walgreens Boots Alliance's pharmacy wholesale division posted a 2% increase in revenue for the year to $15.3 billion.

Follow USA TODAY reporter Nathan Bomey on Twitter @NathanBomey.