James Kehoe
Executive Vice President and Global Chief Financial Officer at Walgreens Boots Alliance
Thank you, Roz and good morning. In summary, we had an excellent start to the year with focused execution across all of our businesses. Adjusted EPS was $1.68 well ahead of expectations and up 53% versus prior year on a constant currency basis. We executed strongly in COVID vaccinations and testing. U.S. retail comps were the highest in 20 years and the international markets continue to recover nicely. Operating cash flow was $1.1 billion in the quarter with free cash flow of $645 million. The strong first quarter performance allows us to increase our full year adjusted EPS guidance from flat to low single-digit growth.
Let's now look at the results in more detail. First quarter sales advanced 7.6% on a constant currency basis, reflecting strong comp growth in Walgreens and the International segment. Adjusted operating income increased 48.5% on a constant currency basis, driven by strong gross profit performance in both pharmacy and retail in the U.S. and the continued rebound in International sales and profitability.
Adjusted EPS was $1.68 in the quarter, a constant currency increase of 53%, driven almost entirely by adjusted operating income. The result was aided by around $0.10 or 9 percentage points of phasing benefits. GAAP EPS increased by $4.58 to $4.13 reflecting a $2.5 billion after-tax gain in the current quarter related to the valuation of our prior investments in VillageMD and Shields, as well as a $1.2 billion charge, net of tax from the company's equity earnings in Amerisource Bergen in the year ago quarter.
Now let's move to the U.S. segment. Sales increased 3.2% in the quarter with a strong performance from Walgreens more than offsetting the 270 basis point headwind from a decline in the AllianceRx Walgreens Prime business. Adjusted gross profit increased 12.3% with both pharmacy and retail growing nicely. Strong sales growth was partially offset by lower reimbursement and higher shrink costs.
Adjusted SG&A spend increased 4.2% in the quarter to 17.2% of sales, 20 basis points higher than last year. The year-on-year increase was primarily due to investments relating to vaccinations and labor, partly offset by savings from the Transformational Cost Management Program and some phasing benefits. Adjusted operating income increased 46.3% as the strong gross profit growth more than compensated for higher costs associated with the COVID-19 vaccination program.
Now let's look in more detail at U.S. pharmacy. Pharmacy sales grew 1.1% including the negative impact from AllianceRx Walgreens Prime. Comparable pharmacy sales were up 6.8%, while comp scripts increased 6.2% with vaccinations accounting for 535 basis points of the script growth. We completed 15.6 million COVID-19 vaccinations in the quarter and administered 6.5 million COVID-19 tests. We are now administering COVID-19 tests at around 7,000 stores.
Flu shots were down as we saw a return to more normalized levels compared to the record levels last year. Additionally, underlying scripts were challenged by staffing shortages and temporary operating hour reductions. Adjusted gross profit grew nicely, a strong sales growth at Walgreens more than offset reimbursement pressure.
Turning next to our U.S. retail business. Comp retail sales increased 10.6% and excluding tobacco, comps were up 11.7%. Compared to pre-COVID levels on a two-year stacked basis, comp sales were up low-double digits. We saw a broad growth across all categories led by 24.7% growth in health and wellness, driven by at-home COVID-19 tests and cough-cold flu. Transactions were up 9% and discretionary categories performed well with beauty comp sales growing 16.6% and personal care up 11.6%. Strong sales growth drove an increase in gross profit. However, gross margin declined slightly constrained by higher shrink from organized crime test and increased import freight costs.
Turning next to the International segment and as always, I'll talk to constant currency numbers. Sales increased 34.2% in the quarter, including the 25.6 percentage point uplift from the formation of our wholesale joint venture in Germany. We are lapping the formation of the Germany JV on November 1, 2020 with the prior quarter including only one month of sales. Excluding this impact, sales were up 8.6%, reflecting the ongoing recovery and strong execution across most international markets, particularly in the UK where sales advanced 13.4%. Adjusted operating income was $164 million in the quarter, up 89% versus prior year, led by higher sales and tight cost control.
Let's now look in more detail at Boots UK. Comparable pharmacy sales increased 8.8%. Stronger demand for services contributed to the increase with sales up more than 200% year-on-year, benefiting from COVID-19 testing. Flu vaccinations were also up and we recorded our largest ever season with 2 million vaccinations during the first quarter, up 150% compared to last year. These positive developments were only partially offset by the non-repeat of favorable prior year phasing of NHS funding.
Comparable retail sales increased 16.3%, reflecting a recovery in footfall and strong commercial execution. Market share strengthened across all categories with beauty performing particularly well. Despite these strong results, footfall in the quarter remains around 20% below pre-COVID levels with particular challenges in travel locations. We do however see continued strength in basket size, which was up around 12% in the first quarter compared to pre-COVID levels.
Finally boots.com continue to do very well. Digital sales almost doubled compared to the equivalent pre-COVID quarter and now account for more than 15% of total retail sales. Looking ahead, we are monitoring the impact of Omicron. The UK government announced a move to slightly tighter restrictions, which started on December 13th. We expect that footfall will remain sensitive to new COVID variants.
Turning next to Walgreens Health. This is our first quarter reporting results for our new Walgreens Health segment. Our majority of the investments in Shields and VillageMD closed on October 29th and November 24th respectively. Shields is immediately accretive with sales of $25 million and adjusted operating income of $10 million in the quarter. Reflecting six days of ownership, VillageMD had sales of $26 million and an adjusted operating loss of $3 million. For this fiscal year, we anticipate VillageMD to be dilutive to EPS, consistent with our October statements. Organic investments in Walgreens Health were slightly lower than expected due to the timing of expenditures. We expect to see rising investments over the course of the year.
Let's now look at some of the key metrics for Walgreens Health. In addition to Clover and Blue Shield, we continue to work with other interested partners and we are approaching our December 2022 goal of 2 million lives. As we scale our access to lives and partnerships, we will continue to build out our Walgreens' health corners with a goal of more than 100 by the end of 2022 with 47 already up and running. We continue to expand the VillageMD footprint and will be in expansion mode for the foreseeable future.
VillageMD currently has 257 locations across 18 markets, 81 of which are co-located with Walgreens stores, up from 55 at the end of fiscal '21. The goal is to have at least 160 co-located clinics in place by the end of '22. Both VillageMD and Shields are on a high growth trajectory. On a pro forma basis, they delivered strong sales growth in their most recent quarter with VillageMD advancing 182% and Shields growing 62%. Overall, we are very excited about our growth potential.
Turning next to cash flow. We generated $645 million of free cash flow in the first quarter, $118 million below prior year. Strong growth in operating income was more than offset by the phasing of working capital. Prior year one-time benefits associated with the passing of the CARES Act and the increased capital expenditures behind key growth initiatives.
Turning now to full year guidance. We are raising our adjusted EPS guidance from flat to low single-digit growth. We now expect higher growth from our base business, reflecting a strong first quarter and higher levels of vaccinations and testing. We expect 30 million vaccinations this year, 5 million higher than our previous guidance. Our Walgreens' Health segment is tracking well against its key milestones with both the Shields and VillageMD transactions closing in the first quarter and the Walgreens Health organic business continuing to invest in future growth.
Within this guidance, we've reflected our decision to increase investments in our team members by an incremental $120 million. As highlighted earlier by Roz, without this investment, our full year adjusted EPS growth would have been 3% to 5%. Let me now provide some additional color on the guidance raise, including puts and takes versus prior guidance. As mentioned, we are planning for higher vaccinations in the fiscal year. Additionally, our U.S. retail comps were very strong in the first quarter and we have seen this momentum continue into the second quarter and we are also driving tight cost management across all of our segments.
Balancing this, we made a decision to increase our labor investments. Recent labor challenges led to somewhat softer script volumes in the first quarter and these investments should help improve the situation. Additionally as with many of our peers, we are experiencing higher rates of shrink loss due to organized crime theft. Inflation is also on the rise. And while we expect to pass through the majority of these higher costs, there may be some short-term impacts.
In summary, we are raising our adjusted EPS guidance to low single-digit growth, driven largely by our U.S. segment. And let me now update you on some of the guidance metrics we provided during our recent Investor Day. Sales in the U.S. are now expected to be around 2 percentage points higher than previous guidance, driven by strength in both pharmacy and front-of-store. As a result, adjusted operating income is anticipated to be flat to up slightly better than our previous guidance. Sales projections for International have also improved to 9% to 11% growth mainly due to improved market growth for our German wholesale business. We still expect International adjusted operating income growth of more than 50%.
Walgreens Health remains on track. Sales will be slightly lower due to the timing of regulatory approval related to CareCentrix; however, this has an immaterial impact on earnings. Finally, we expect an adjusted tax rate of around 16%, consistent with prior guidance. With that, let me now pass it back to Roz for her closing remarks.
