RAD Rite Aid Corp

By Paul Ziobro and Lisa Beilfuss 

Walgreens Boots Alliance Inc. executives warned of a long period of uncertainty in the U.K. following the country's vote to leave the European Union.

The U.K., where Walgreens owns the Boots drugstore chain, is the company's second-largest market by sales after the U.S. Aside from the effects of the British pound's plunge, the company expects tumult from the Brexit vote will give consumers pause before spending.

"The situation is very volatile at this time" Chief Executive Stefano Pessina said Wednesday. "The period of uncertainty will be quite long, whatever happens."

Still, the company believes the Boots chain will be able to overcome the jitters, given its retail business has outperformed other, more discretionary chains during past economic slumps. One reason: Despite uncertainty, women still spend money on makeup.

"People still buy into beauty, even in tough times," said Alex Gourlay, the company's co-chief operating officer who oversees all retail operations. The company has about 2,500 stores in the U.K. and about 9% of total sales last fiscal year came from the country.

The comments came as Walgreens Boots posted a slight increase in overall sales the quarter ended May 31, as the company filled more prescriptions in its U.S. business. The sale of drugs far outperformed meager sales growth in the front of the company's drugstores, where Walgreens is focusing on more profitable sales like beauty products and gifts rather than pushing discounts on sodas and snacks.

In recent trading, Walgreens Boots shares fell 2.9% to $81.10. The shares have slipped 4.8% on the year.

Walgreens Boots is in the midst of an overhaul following the 2014 merger of the U.S. drugstore chain Walgreen with the European retailer and drug wholesalers Alliance Boots. With reimbursement rates for prescription drugs under pressure, the company is cutting costs and forging new ties with drug manufacturers and health insurers.

It is also in the midst of buying the smaller drugstore chain Rite Aid Corp. for $9.4 billion as it takes part in a rapidly consolidating U.S. health-care sector. Mr. Pessina expressed confidence Wednesday that the deal, which is undergoing a review by U.S. antitrust regulators, will close as planned before the end of the year.

"We are very confident that this deal will go through," Mr. Pessina said. "Our lawyers are telling us that we don't have any negative signal" from federal regulators. Rite Aid shares rose 1.8% to $7.43 in early trading, but are still well below the proposed $9-a-share purchase price.

In its latest quarter, the Deerfield, Ill., company said overall sales at stores open at least a year rose 3.9%, better than the 3.7% analysts expected and up from the 2.2% pace -- the lowest in three years -- logged in the second quarter.

Sales in Walgreens' pharmacy business jumped 6% on a comparable basis, nearly double the prior quarter's rate, as it filled 4.5% more prescriptions thanks to rising Medicare Part D volume. At the front end, where the company sells items from snacks to greeting cards to beauty products, sales inched up 0.1% after declining 0.3% a quarter earlier. The company attributed the gain to strong sales of health and beauty items and from its photo business.

Overall for its fiscal third quarter, Walgreens reported a profit of $1.10 billion, down from $1.30 billion a year earlier. Excluding merger-related items and a change in the fair value of warrants exercised to buy a stake in AmerisourceBergen, among other things, the company said per-share profit rose to $1.18 from $1.02.

Revenue edged 2.4% higher to $29.50 billion.

The company lifted the low end of its per-share profit forecast for the year by a dime, now expecting to report $4.45 to $4.55 in adjusted earnings per share. Walgreens said the guidance assumes no impact from the pending Rite Aid deal.

Write to Paul Ziobro at Paul.Ziobro@wsj.com and Lisa Beilfuss at lisa.beilfuss@wsj.com

(END) Dow Jones Newswires

July 06, 2016 11:30 ET (15:30 GMT)

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