George Hill : Also, James, I know that you guys don’t provide quarterly guidance, but could you maybe talk a little bit about expectations for cadence this quarter had a good portion of COVID and COVID pull forward into it. Fiscal Q2 seems like it’s going to be a little bit below The Street. And maybe the question to focus on here is kind of what inflects the most as you think about the back half of the year? And if we think about earnings risk, like maybe talk about the biggest points of inflection, which we would see as the biggest points of risk.
James Kehoe : Yes. That’s an unexpected question. I would like to give a little bit of context first on the first quarter because there’s a perception out there that it was overly dependent on tax rate. And I do want to give you our position. As we look against our budget internally, we actually came in $0.01 better and only $0.03 was from tax. So, the tax upside we predicted on the full year, the 16% is still intact, and we had already planned for this type of tax rate in the quarter. As I said, $0.03 better. We’re about $0.04 weaker on the operating business, and it was all in international. To be honest, it’s a bit of a planning blow. They didn’t predict carefully enough what the reimbursement timing was going to be like from the NHS.
So it became a short-term margin issue. And I do want to reassure the listeners, we see a return to very strong profit growth in the International segment in the second quarter. So compared to market expectation — to our expectations, we came in relying $0.03 on tax. So the beat of $0.04 was you can say all due to tax, right? But the core business was on track. And the only thing that surprised us was international and it was more about planning than it was execution. And I do want to emphasize, we won the Thanksgiving — sorry, Black Thursday type events in the UK and then we did put it in the prepared comments. We make 40% of the profit in the UK in December. The growth in December was 15% on the front of store, which is 70%. So now I’ll go to your real question, which is the cadence between the first and second half.
We looked into the second quarter, and versus the consensus that was out in the market that the consensus felt a little heavy only for one reason. There is a shift going on right now. Vaccinations have slowed down. The boosters have slowed down a bit. So there’s a slight shift into the Q3 from Q2, and that cost us about $0.09. That’s the only change we’re making to our thinking first half versus the budget we had before. There are no other changes. And I just want to be very clear on that. When you look at performance versus consensus models, and we do look at this, and I’ll just be very transparent. We collect like, I don’t know, 2017 models and we compare whether it’s gross profit or SG&A and all the rest. Our actual absolute gross profit in the quarter was better than consensus by $60 million and it was better than FactSet by $94 million.
So where we’re getting the disconnect is on the SG&A. And my hypothesis there is there are some impacts from currency. There are some impacts from the way you’ve built in some of the investments in labor. And we have to dig into it that we haven’t communicated succinctly enough what the SG&A outlooks are on a quarterly basis. But we’re looking at here. We’re exiting the quarter feeling like operationally most of the businesses were on track. In fact, the U.S. business came in stronger than the budget. So let’s look at first half, second half. We basically said now it’s a 50-50 split. And that implies that the first half will be down EPS roughly 28% to 30%, just round numbers. And it’s driven by COVID, the labor investments and the healthcare investments.
It’s — the story doesn’t change in the second quarter, and it’s consistent with original guidance. And you’ve asked for — and this is a bit of a long-winded response. You’ve asked for what are the key drivers, first half versus second half. The first one is vaccinations and testing is a headwind in the first half of 20 to 21 percentage points. So if you take the first half of the year, we will be pulled down to the tune of 21%. If you take the second half, that goes below 10%. So the change of the headwind, it gives you an improved profile of about 11 to 12 percentage points. The biggest driver, however, is healthcare. In the first half of the year, that’s a negative drag on income in the low single digit. And we said in the prepared comments that the healthcare business will drive EPS around mid-teens, so call it 15%.
So the change between the first half and the second half, you got 11 to 12 points coming from COVID and you’ve got, call it, 15 to 18 points coming from healthcare. The other big numbers are reimbursement, and we haven’t provided much guidance on this in the past. We expect, and we have a very good line of sight because I would call it, 95% of all contracts are closed, reimbursement in the second half of the year compared to the first half will be less than 50%. So this gives us a tailwind of approximately $350 million in the second half of the year. So if you take second half versus first half, just due to the timing of reimbursement, I’m probably going to get 14 percentage points of growth, and I have extremely high line of sight to that number.
The second one is volume. Volume in the second half will probably be — the volume contribution in pharmacy will be about 3x what it was in the first half because as we said, the marketing programs will kick in later in the year. That’s worth probably another $200 million, so call it 8 points of growth. So we’re going to see a big change in the trajectory of the pharmacy business in the first half versus the second half. And the final one I’ll leave you with is, we did — while we hit the absolute gross profit in the quarter, pharmacy margins were lower than we anticipated because we had some timing items on cost of goods sold, they’re going to wash out in the remainder of the year. And that’s probably another $200 million to $300 million. So what we’re really looking at is quarter one being a fairly difficult quarter in terms of — the majority of the costs are concentrated in the first half of the year and have coming out in the second half.
Reimbursement, as I said, $350 million. Good line of sight volumes on pharmacy. Good line of sight at the programs are there. There’s always some risk to it. And the cost of goods sold items another $300 million. These are very large numbers. So you’re talking about pretty explosive growth in the U.S. business in the second half. And I do want to reiterate, we’re going to see the same from the international business. So I don’t know if that’s enough insight, I’ve gone on for too long, it’s probably too much, but
Operator: Next question comes from the line of Elizabeth Anderson from Evercore ISI.
Elizabeth Anderson : Maybe to piggyback just off of that last question, thanks for all the details there. Could you specifically comment on some of the other things you called out in terms of shrink the strong retail performance? And then also what your expectations are for cold, cough and flu given some of the product shortages we’ve been hearing about?
James Kehoe : Yes. I think the shrink is built in the forecast. We’re probably — maybe we cried too much last year when we were hitting numbers that were 3.5% of sales. We’re down in the lower 2s, call it, the mid 2.5%, 2.6% kind of range now. And we’re stabilized. So — but we’ve spent a fair amount, and that could be one of the disconnects in SG&A. We’ve put in incremental security in the stores in the first quarter. Actually, probably we put in too much and we might step back a little bit from that. But what we’re seeing is we’re putting in more law enforcement as opposed to security companies. The security companies are proven to be largely ineffective. So we’re investing more SG&A to drive the lower shrink. And it’s — actually, we’re quite happy with where we are.
It’s around 2.5% to 2.6%. So that’s well below the prior year levels. And we have a fairly good line of sight to new programs going in. The second part of the question? Cough, cold, flu. Yes, we did get a bounce from cough, cold, flu in the quarter. But as you look at our retail business in the first quarter, where the comps came in at cough, cold, flu boosted the result for the tune of, I think it was 220 basis points. But on the flip side is the COVID OTC tests were a headwind of 170. So actually, the way I’d encourage you to think about the first quarter is, if you take out the noise of the two of these, roughly the business is doing a 2% comp. And if you go back to the guidance we gave three months ago, we actually said we expect the retail business to do a 2% to 3% ex COVID.
We did see a little bit of weakness in some of the — some other categories. But I think where we won in the first quarter was we built fairly aggressive inventory levels, and we were extremely well positioned on cough, cold, flu and we’ve actually gained share in the category. We will get some opportunity on the full year from cough cold flu. It’s too early to say what’s going to happen in the second quarter. Honestly, we’ve seen a little bit of a slowdown in the last few weeks. Flu vaccinations are still up, I think, 9% or 10% versus prior year. So there’s no issue in cough, cold, flu. It has given us a bit of a boost. But as I said, if you think about cough, cold, flu in the first quarter, it was offset by these cost items in pharmacy that I talked about, and they’ll roll out of the system in the second half.
Operator: And your next question comes from the line of Lisa Gill from JPMorgan.
