Walgreens (WBA) recently reported a larger-than-anticipated quarterly loss, citing store closures and weaker retail sales. Despite this, shares saw a significant rise, possibly impacting the company’s ability to carry out a potential private equity sale. The company plans to accelerate the rate of store closures, with the next 450 locations already identified. Walgreens is also considering selling its stake in the VillageMD business and exploring strategic options for Summit Health-CityMD. While the company’s net loss rose to $245 million, adjusted earnings per share were 35% above expectations.
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Revenue also increased to $39.5 billion, a 7.6% rise from last year, mainly due to international sales and its U.S. physician business. The company maintained its annual earnings outlook, believing that growth in healthcare sectors will outweigh declines in its U.S. retail pharmacy division—positive news for investors looking for a turnaround in the stock.
The Road to Recovery
Walgreens Boots Alliance, Inc. is a global healthcare and retail company primarily in the U.S., Germany, and the U.K. Its operations are divided into three segments: U.S. Retail Pharmacy, International, and U.S. Healthcare. The U.S. Retail Pharmacy segment includes retail drugstores and health services, offering products across health, beauty, personal care, and general merchandise. The International segment sells prescription drugs and other products abroad, operating pharmacy-led health and beauty businesses under brands like Boots, Benavides, and Ahumada. The U.S. Healthcare segment encompasses VillageMD, Shields, and CareCentrix, focusing on value-based care and post-acute home care management.
Management Pinpoints Areas for Improvement
The company has been careening toward insolvency or potential acquisition. Yet, management has identified four main focus areas and embarked on a journey to turn things around for the company. The first area is stabilizing the U.S. retail pharmacy business, with early results from the footprint optimization program appearing promising. A dedicated team has been assembled to handle the accelerated pace of store closures over the next three years, with 450 stores already identified. Feedback suggests that the reduced footprint will yield a healthier business environment.
To improve pharmacy operations, steps have been taken to optimize the productivity of the Micro Fulfillment Centers (MFCs), which have seen a 23% year-over-year increase in shipped volumes and reduced costs by 13%. Efforts are also being made to ensure fair value for services provided during partner reimbursement discussions.
The third area of focus is the turnaround of the consumer retail business, which has been challenged by a decrease in discretionary consumer spending. In response, store inventory strategies have been adjusted, and a more customer-centric range of products is being deployed. Products that align with a health and well-being focus, such as women’s wellness items, superfoods, and sports nutrition, are being introduced. Virtual care and home delivery services are also expanding to cater to changing consumer preferences.
Lastly, a process is underway to sell non-core assets, such as Village Medical, and options are being assessed for Summit CityMD. Efforts are focused on reducing net debt and improving the health of the balance sheet. Greater cash flow, achieved by decreasing capital expenditures and increasing adjusted operating income, is a longer-term goal.
Accelerated Store Closures Come at a Cost
For Q1 of FY2025, Walgreens reported $39.46 billion in revenue, surpassing market expectations by $2.04 billion. This was driven by a 7.5% increase in sales year-over-year thanks to growth across all segments.
However, due to the Footprint Optimization Program in the U.S. Retail Pharmacy segment, the operating loss of $245 million was significantly more than the $39 million loss from the year before. Nevertheless, these losses were somewhat mitigated by cost-saving initiatives and growth in the U.S. Healthcare segment. The higher operating loss primarily drove a net loss of $265 million. Despite this, there was a $141 million improvement in net cash used for operating activities compared to the previous year. Non-GAAP earnings per share (EPS) of $0.51 exceeded estimates by $0.13.
Free cash flow was negative $424 million, an improvement of $363 million from the same period a year ago. This was primarily due to decreased capital expenditures of $223 million and higher adjusted operating income, excluding sale-leaseback.
Following the first quarter’s promising results, WBA’s management has issued forward guidance for Fiscal 2025, anticipating an adjusted EPS range of $1.40 to $1.80. Growth is predicted in the U.S. healthcare and international sectors and is expected to counterbalance the decline in U.S. retail pharmacies.
Positive Price Momentum & Value
The stock has been cascading down for some time, shedding 71% of its value over the past five years. It trades near the lower end of its 52-week price range of $8.08 – $24.20, but the recent rebound has momentum trending in the right direction as it bullishly trades above most major moving averages. Further, at a P/S of 0.07x, it looks to be a screaming value compared to the Consumer Staples sector average of 1.11x.
Analysts following the company have taken a cautious approach to WBA stock, though the recent Q1 results have sparked some positive change. For instance, Evercore ISI’s Elizabeth Anderson raised the price target on the shares to $12 while maintaining an In-Line rating, noting the Q1 report “surprised to the upside.” She remains on the lookout for additional data points to support a return to longer-term U.S. Retail adjusted operating income growth.
Walgreens Boots Alliance is rated a Hold overall, based on the recommendations of 13 analysts. Their average price target for WBA stock is $10.21, representing a potential downside of -13.18% from current levels.
Bottom-line on WBA
Walgreens has faced financial challenges due to store closures and declining retail sales. However, there are signs of positive changes, with a rise in shares, a 7.6% increase in revenue, and earnings per share 35% higher than expected. Management has a strategy to get the company back on its feet, including accelerating store closures, exploring the sale of certain business stakes, and focusing on stabilizing the U.S. retail pharmacy business, improving pharmacy operations, turning the consumer retail business around, and selling non-core assets. As the company continues to implement changes, contrarian investors might find this potential turnaround story of interest.
