Despite a challenging year marked by a 57% stock dip, Walgreens (WBA) is forging ahead with plans to improve its financial performance. The pharmacy giant has announced plans to bolster its financial health by implementing measures that include strategically closing 1,200 unprofitable stores over the next three years. This move is part of an optimization program designed to tackle gross margin pressures and enhance operational efficiency. Alongside cost-cutting initiatives that have already surpassed a projected $1 billion, Walgreens has experienced a 6% rise in sales to $37.5 billion.
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While the company’s fiscal Q4 report beat expectations, issues persist. Challenges in the U.S. retail market, reimbursement pressures, and a substantial net loss of $8.6 billion in the Fiscal year 2024 underscore the company’s hurdles. As it navigates these obstacles, Walgreens’ depressed share price may present a turnaround opportunity for contrarian investors willing to take on significant risks.
Walgreens Shrinking its Footprint
Walgreens (WBA) is a multi-segment healthcare, pharmacy, and retail company that operates across the United States, Germany, the United Kingdom, and other international markets. Its services and operations are divided into three segments: U.S. Retail Pharmacy, International, and U.S. Healthcare.
Recently, WBA announced its financial results for the fiscal year and the fourth quarter that ended on August 31. The company also introduced a footprint optimization plan to close approximately 1,200 stores over the next three years. This includes a target of closing approximately 500 stores in Fiscal 2025, which, according to the company, will immediately increase adjusted EPS and free cash flow.
Walgreens’ Recent Financial Results
The company has reported financial results for the fourth quarter. Revenue of $37.5 billion was up 6% year-over-year and exceeded expectations by $1.95 billion. The increase was despite an overall downturn with a loss per share of $3.48, which included non-cash charges related to past opioid liabilities. Although the adjusted earnings were down 40.8 percent on a constant currency basis due to net reimbursement pressure, these were partly offset by cost savings and growth in U.S. Healthcare. This delivered a non-GAAP adjusted EPS of $0.39, surpassing estimates by $0.03.
For the 2024 Fiscal year, Walgreens reported a loss per share of $10.01, primarily attributed to a challenging retail environment. However, cost savings and an improved U.S. Healthcare segment helped mitigate these effects. The company’s sales for 2024 increased by 6.2 percent to $147.7 billion, and fiscal targets for cost savings, capital expenditure reduction, and working capital initiatives were exceeded.
What Is the Price Target for WBA Stock?
The stock has been on an extended downtrend, shedding over 74% in the past three years. It trades near the bottom of its 52-week price range of $10.69 – $29.30 and shows negative price momentum by trading below the 20-day (12.87) and 50-day (14.87) moving averages. The P/S ratio of 0.063x sits below the Pharmaceutical Retailers industry average of 0.23x, suggesting the stock trades at a relative discount.
Analysts following the company have welcomed its announced austerity measures, though they continue to take a cautious stance on WBA stock. For example, UBS, Barclays, and Evercore ISI have raised their price targets on Walgreens following meetings with the management team. UBS raised its price target to $10 from $9 while maintaining a neutral rating with the view that recovery is still a year or two away. Barclays increased Its target to $8 from $7, keeping an underweight rating due to ongoing concerns with U.S. retail pharmacies. Evercore ISI raised the target to $10 from $7.50 and remained in line with shares, highlighting that investors will heavily scrutinize store closures and working capital improvements.
Walgreens is rated a Hold overall, based on 12 analysts’ recent recommendations. The average price target for WBA stock is $13.67, representing a potential upside of 26.69% from current levels.
Final Word on Walgreens
Deep in the throes of fiscal challenges and a significant stock plunge, Walgreens struggles to improve its financial status, chiefly through closing approximately 1,200 unprofitable stores. The company successfully surpassed its cost-cutting initiative of $1 billion and experienced a rebound in sales growth in the most recent quarter. Despite challenges faced in the retail market, such as reimbursement pressures, the company’s lower share price may offer an attractive entry point to investors willing to shoulder the potential risks of a turnaround that could take a year or two to develop.
