James Kehoe
Executive Vice President and Global Chief Financial Officer at Walgreens Boots Alliance
Thank you, Roz, and good morning. Adjusted EPS of $0.96 was broadly in line with our expectations. On a constant currency basis, EPS declined 29% versus prior year levels. As mentioned before, we were lapping an especially strong prior-year quarter with EPS growth of over 90%. We administered 17 million vaccinations last year compared to 4.7 million in the current quarter, leading to an EPS headwind of around 18 percentage points. We also continued to invest in our fast-growing Walgreens Health business.
Sales for the segment grew 65% on a pro forma basis, and the growth investments led to a negative EPS impact of 6 percentage points. Our US retail business continues to execute strongly, and our international markets more than doubled segment AOI compared to the prior year quarter. Sales grew ahead of expectations and cash flow was solid, with year-to-date operating cash flow of $3.8 billion and free cash flow of $2.6 billion. The Transformational Cost Management Program is performing ahead of expectations with an expanding funnel of initiatives, and we are now raising our annual cost savings goal to $3.5 billion by fiscal year 2024.
Finally, with our third-quarter performance that was broadly in line with our expectations, 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. Third quarter sales declined 2.8% on a constant currency basis, strong growth from Walgreens, and the International segment. And sales contributions from Walgreens Health were more than offset by a 720 basis point impact from the sales decline at AllianceRx Walgreens.
If you exclude the negative impact from AllianceRx and the positive benefit from Walgreens Health M&A, constant currency sales growth was approximately 3%. Adjusted operating income declined 34% on a constant currency basis, driven by a decline in US pharmacy as it lapped the peak COVID-19 vaccinations in the year-ago quarter and planned growth investments in Walgreens Health. This was partly offset by solid gross profit performance in US retail and continued strength in international sales and profitability. Adjusted EPS was $0.96 in the quarter, a constant currency decrease of 28.9%, driven mostly by adjusted operating income.
GAAP EPS decreased 74% to $0.33, reflecting a $683 million charge for the opioid settlement with the State of Florida and higher one-time charges in the quarter related to the Transformational Cost Management Program. Now let's move to the year-to-date highlights. Year-to-date sales advanced 2.7% on a constant currency basis, including a 500 basis point negative impact from AllianceRx. Without this negative impact and excluding the Walgreens Health M&A activity, core sales growth was around 8%. Adjusted operating income increased 13.7% on a constant currency basis, reflecting adjusted gross profit growth across both pharmacy and retail in the US and a continued rebound in international sales and profitability.
Adjusted EPS advanced 13.9%. GAAP EPS increased by $3.60 to $5.49, reflecting a $2.5 billion after-tax gain in the first quarter related to the valuation of our prior investments in VillageMD and Shields as well as lapping a $1.2 billion charge net of tax from the company's equity earnings in AmerisourceBergen in the year-ago period. This was partly offset by the Florida opioid legal settlement in the current quarter. Now let's move to the US segment. Sales decreased 7% in the quarter, a solid performance from Walgreens, up 1.7% despite lapping peak COVID-19 vaccinations, was more than offset by an 850 basis point headwind from AllianceRx.
Adjusted gross profit decreased 9.6%, with high single-digit growth at retail, more than offset by a decline in pharmacy. Procurement savings and the strong retail performance were more than offset by fewer COVID-19 vaccinations and lower reimbursement rates. Adjusted SG&A spend decreased 0.9%. Lower COVID-19 vaccinations and continued cost discipline were only partly offset by higher labor costs and the timing of marketing spend. SG&A as a percentage of sales increased 110 basis points to 17.9% of sales, and this was almost entirely due to an adverse mix impact as a result of the AllianceRx sales decline.
Adjusted operating income decreased 34%, mainly reflecting lower pharmacy performance, including a challenging comparison against peak COVID-19 vaccinations in the year-ago quarter. Now let's look in more detail at US pharmacy. Pharmacy sales declined 9.7%, negatively impacted by an 11.2 percentage point impact from AllianceRx Walgreens. Comparable pharmacy sales were up 2%. Comp scripts decreased 1.8%, but excluding vaccinations, comp scripts increased 2.1%. We completed 4.7 million COVID-19 vaccinations in the quarter compared to 17 million vaccinations in the prior year quarter, and we administered 3.9 million COVID-19 tests in the quarter compared with 3.4 million tests in the prior-year quarter.
Pharmacy benefited in the quarter from better trends in seasonal scripts. However, while we did see some improvement in the quarter, scripts continued to be challenged by temporary operating hour reductions due to labor shortages. We estimate an impact of around 190 basis points on comp scripts in the quarter. Pharmacy adjusted gross profit declined as procurement savings and volume growth were more than offset by reimbursement pressure, and we lapped peak COVID-19 vaccinations in the prior year.
Comp retail sales increased 1.4%, and excluding tobacco, comps were up 2.4%. We saw strong growth across health and wellness, driven by at-home COVID-19 tests and cough, cold flu. Personal care was up 2.6%, but the consumables and general merchandise categories were impacted by strong sales of COVID-19-related items last year and the planned decline in tobacco. Gross margin increased strongly year-on-year due to effective margin management and stabilizing shrink levels, partly offset by supply chain pressures. Turning next to the International segment. And as always, I'll talk to constant currency numbers.
International had a strong quarter. Sales increased 9.3%, reflecting growth across all international markets, with Boots UK advancing 13.5% and Germany wholesale growing 6.8%. Adjusted operating income was $174 million in the quarter, more than doubling versus prior year, led by sales growth and tight cost control. The integration of our Germany 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. Boots UK sales grew 13.5% in the quarter, led by strong retail performance. Comparable pharmacy sales decreased slightly as we lapped favorable NHS reimbursement timing in the year-ago quarter.
Comparable NHS volumes showed modest growth, while pharmacy services advanced 22% in the quarter, with stronger demand for new online health care services. Comp retail sales advanced 24%, reflecting a recovery in footfall and strong commercial execution. Market share increased across all categories with beauty performing particularly well. Despite the strong performance, store footfall in the quarter remains around 20% below pre-COVID levels.
Travel locations are now improving, but remain quite subdued. We saw continued strength in basket size, which is up around 14% in the third quarter compared to pre-COVID levels. Boots.com sales more than doubled compared to pre-COVID levels. More than 13% of total UK retail sales came from our digital channels in the quarter, up from around 6% pre-COVID. Turning next to Walgreens Health. Segment sales were almost $600 million in the quarter, with VillageMD contributing $511 million and Shields Health contributing $85 million.
Walgreens Health AOI was a loss of $129 million in the quarter. Organic investments accounted for $31 million. Investments at VillageMD more than offset the profit contribution from Shields Health and led to a $97 million AOI loss across our majority investments. VillageMD sales advanced 69% on a pro forma basis, reflecting existing clinic growth and footprint expansion. At the end of the third quarter, VillageMD had 315 clinics, an increase of 97 clinics year-over-year. Shields delivered a strong quarter. Pro forma sales growth was 47% with improved operating margins, driven by growth from recently signed contract wins and by expanding their value-add proposition with existing health system partners.
Let's now look at some of the key metrics for Walgreens Health. As Roz mentioned, we have already exceeded our December '22 goal of 2 million covered lives, and we recently announced a strategic partnership with Buckeye Health Plan. The rollout of VillageMD continues, with 120 co-located clinics opened at the end of the third quarter, up from 94 at the end of the second quarter. We are progressing towards our goal of 200 by the end of this calendar year. Our fiscal '22 sales goal is now at $2 billion, reflecting a delay in the closing of the CareCentrix investment.
Apart from that, there are no changes to our underlying sales assumptions. And as you can see, VillageMD and Shields are delivering impressive growth with pro forma combined sales growth of 65% in the quarter. Turning next to cash flow. Year-to-date free cash flow was $2.6 billion, $737 million below the prior year, as we cycled through some exceptional headwinds. Free cash flow was adversely impacted by the working capital impact of a decline in the AllianceRx Walgreens business and the year-over-year impact of COVID-19-related government support.
Free cash flow also included a $240 million increase in capital expenditures behind our growth initiatives, including the VillageMD footprint expansion, rollout of the new automated microfulfillment centers, and continued omnichannel and digital investments. Turning now to full year guidance. We are maintaining our full year guidance of low single-digit growth in adjusted EPS. We have raised our estimate for the base business slightly from 6% to 8% growth to 7% to 9% growth to reflect strong US front-of-store performance and increased testing and vaccinations.
We are now expecting 35 million vaccinations this year compared to 31 million previously. Investments in our healthcare business negatively impact EPS growth by around 6 percentage points compared to 5 points previously. In summary, we are executing well, performing in line with our expectations and reconfirming our full year EPS guidance of low single-digit growth in constant currency. I would remind you that this is better than the original guidance we provided at the start of the year of flat EPS growth year-over-year. Next, I will offer some additional color on our fourth quarter outlook.
First, let me remind you that we are lapping a strong year-ago quarter with EPS growth of 28%. The prior year growth was driven by strength in COVID-19 vaccinations with 13.5 million administered last year versus an estimated 2.9 million this year. Additionally, last year, we saw strong front-end results aided by at-home COVID-19 tests. Consistent with what we said previously, we anticipate some headwinds in the fourth quarter, and this chart highlights the most important ones.
Vaccinations are an expected headwind of 15 to 17 percentage points. Investments to build out our Walgreens Health segment could result in 10% to 12% impact on fourth quarter EPS. Other headwinds include labor investments of around 5 percentage points and lapping prior year onetime gains of approximately 4 percentage points of EPS growth. Combined, these headwinds amount to an expected 34% to 38% year-on-year headwind and leads to full year EPS growth of low single digits.
I would caution against any extrapolation of these EPS impacts. For example, labor costs include premiums [Technical issue] COVID-19 is the single biggest unknown, and it is difficult to predict today how new variants, booster adoption, reimbursement dynamics, and underlying health policies will impact consumer behavior. Against this backdrop, we have a strong array of strategic growth initiatives that will drive our long-term growth algorithm.
First, we expect script volume to recover as we get back to normal operating hours and launch targeted patient retention programs. Second, our US retail business is demonstrating good momentum through digital and omnichannel growth from my Walgreens loyalty program, owned brand innovation and alternative profit streams. Fiscal 2022 was a strong year, and we have extensive plans and initiatives to drive continued success. Third, fiscal year 2022 has been affected by elevated retail shrink, running at above 3% of sales year-to-date. Trends in the most recent months are more promising as we roll out actions to counteract the rising shrink levels, and we expect shrink to trend downwards in 2023.
Fourth, the International segment is achieving very strong results, and it is clear that next year should see continued sales and profit growth. Fifth, the Walgreens Health segment is scaling up and margins will build over time. Additionally, we are aggressively working to capture synergies across our various healthcare investments. Overall, we expect the Walgreens Health EPS headwind in 2023 to be much lower than this year. Lastly, we continued to expand our save[phonetic] to invest to grow program and have raised the overall target savings for the Transformational Cost Management Program from $3.3 billion to $3.5 billion by fiscal 2024. The majority of the increase will benefit fiscal '23. In summary, we are aggressively driving growth initiatives, and we remain fully committed to achieving sustainable low teens EPS growth over the long term. With that, let me now pass it back to Roz for her closing remarks.