Can the Rally in Walgreens (WBA) Stock Continue?

Walgreens Boots Alliance (WBA) stock is off to a solid start in 2025 and has gained nearly 33% over the past two weeks. The bulls are pitching WBA stock as a turnaround story because management has laid out plans to close underperforming stores and businesses. Certainly, this is a move in the right direction. But there are challenges that could still keep pressure on this business.

Walgreens is a major pharmacy chain with a rich legacy that stretches back to the 1900s and operates in eight countries, including the U.S. and the United Kingdom (U.K.). The company sells health and beauty products including prescription drugs, personal care goods, and cosmetics, among others.

I am taking a wait-and-see approach with Walgreens and am thus neutral on the stock. The company is early in its turnaround strategy, and if management can deliver on its promises then it might become a good investment for generating income.

Why WBA Stock is Up

Walgreens reported quarterly results for the Fiscal first quarter of 2025 a few days ago and delivered positive surprises that fueled the post-earnings rally. However, I wouldn’t get too optimistic here because there is still a lot of execution needed. The company reported earnings per share (EPS) of $0.51, which beat analysts’ expectations of $0.38. The revenue was $39.46 billion and also beat expectations by $2.04 billion.

Additionally, management gave more clarity on priorities for the upcoming quarters and said that the company is on track to close 450 additional underperforming stores by the end of Fiscal 2025. It’s also in the process of divesting its underperforming healthcare services business called “Village Medical.” These are reasonable moves by Walgreens to streamline its footprint and could lead to improved profitability and better financial health.

However, there are fundamental reasons why Walgreens might not be as successful as it once was. For starters, it isn’t as peerless as it was and is competing with big-box stores and dollar stores now, in addition to other pharmacy chains. The company also hasn’t been the best innovator when it comes to improving shoppers’ experience. Consumers would prefer having products delivered to their homes with Amazon’s (AMZN) pharmacy than visiting their local Walgreens.

Walgreens Turnaround?

I am taking a wait-and-see approach with Walgreens stock because I do see the company heading in the right direction, but execution is key and there are competitive pressures. The front-end retail business is tough because there are companies like Amazon, Walmart (WMT), and Target (TGT) that offer a wider assortment of products and often at better prices. This is why its ex-pharmacy U.S. retail sales have been falling over the past three years, declining from $28.6 billion in 2022 to $26.9 billion in 2024.

However, if management closes underperforming stores, these declines can stabilize. The good thing about being in pharmaceuticals is that it’s a recession-proof industry. People do need medication even when times are difficult. But the downside is competition. Walgreens slashed prices for 1,300 products back in June 2023 to compete with other low-cost providers. Of course, when you do not have a competitive edge, you do not have pricing power.

Consequently, the company’s profit margins have been declining. Its gross profit margin has declined from 20% in 2020 to 18% in 2024. As Walgreens divests its underperforming services business and closes surplus stores, its bottom line can improve. The company also reduced its capital expenditures by $223 million year over year during Fiscal Q1 2025, and sees further potential for reducing them.

WBA Stock Valuation

Walgreens stock is currently trading at a forward price-earnings (P/E) multiple of eight and that is cheap, but it is early in its turnaround strategy. Accounting for execution risks the company may face over the next few quarters, I do not find the current multiple compelling enough and suspect some hiccups in the near-term. Therefore, I am neutral on WBA stock and would wait to see if management can deliver on what they’ve promised.

In case the turnaround plays out, Walgreens can be a good investment for a dividend stock investor. Pharmaceuticals is a legacy and recession-proof industry and Walgreens is a major player. The company and its predecessor have paid dividends to investors for over 90 years.

Is WBA Stock a Buy?

On the Street, WBA stock sports a consensus Hold rating based on two Buy, eight Hold, and three Sell recommendations. The average price target of $10.50 implies downside risk of 14.2% from current levels.

Read more analyst ratings on WBA stock

Conclusion

Walgreens is in the early innings of a turnaround but the execution risk is high. The current multiple is not compelling enough and there might be further near-term risks to the downside. However, pharmaceuticals is a recession-proof industry and the company is a major retail pharmacy chain. If Walgreens’ profits stabilize, it can continue rewarding investors with income, as it has for many decades.