Stock price of Alliance Walgreens Boots (NASDAQ: WBA) The stock fell after the release of its fiscal third-quarter financial results on June 27, as the stock suffered one of its worst days ever. The stock price has now fallen more than 53% since the start of 2024.
Let’s take a look at Walgreens’ most recent quarterly report, why the stock fell, and whether now is the time to buy.
Reduced routes, store closures and new plan
For its fiscal third quarter (ended in May), Walgreens saw revenue increase 2.6% year over year to $36.4 billion. However, adjusted earnings per share (EPS) fell 36.5% to $0.63. U.S. retail pharmacy sales increased 2.3% year over year, with same store sales up 3.5%. Comparable pharmacy sales increased 5.7%, while comparable retail sales decreased 2.3%. Adjusted operating profit plunged 47.9% year-over-year to $501 million, hurt by weak retail sales and pharmacy reimbursement pressures.
International sales increased 2.8% from a year earlier. Boots UK sales increased 1.6%, same-store retail sales increased 6% and pharmacy sales increased 5.8%. Adjusted operating profit fell 15.8% from a year earlier to $175 million.
Revenue from its U.S. healthcare segment rose 7.6% year over year to $2.1 billion, with adjusted profit Earnings before interest, taxes, depreciation and amortization (EBITDA) by $23 million, an improvement from the $113 million decline recorded a year ago. VillageMD’s revenue grew 7% year over year, while Shields’ revenue jumped 24%.
Gross margins fell to 17.8% from 18.6% a year ago. Gross margins at its U.S. retail pharmacy business fell to 17.7%, from 19.1%. This shows the company continues to be challenged by drug plan managers over drug prices.
Walgreens generated negative operating cash flow of $314 million in the first nine months of the year and negative free cash flow of $1.4 billion. The company ended the quarter with $8.9 billion in debt and $703 million in cash.
Looking ahead, the company reduced its full-year adjusted EPS guidance to $2.80-$2.95, from a prior guidance of $3.20-$3.35. Management expects the challenging consumer environment and weak script volume growth it is seeing to continue into 2025.
As a result, the company plans to close a “significant portion” of its 8,700 U.S. locations over the next three years, and review about 25% of its unprofitable locations. The company also said it will invest to improve the customer and patient experience, including accelerating its digital and omnichannel offerings, strengthening its loyalty program and reducing the number of brands and SKUs on its shelves.
The company also plans to reduce its stake in VillageMD and no longer be the majority shareholder. However, it plans to maintain its positions in Shields and Boots UK.
The company also remains in discussions with pharmacy benefit managers (PBMs) and healthcare issuers to create a better reimbursement system that will help stabilize its pharmacy margins and ensure fair payment.
Is this drop an opportunity to buy the stock?
Reimbursement rate pressures, which continue to hurt Walgreens’ margins and profitability, remain its biggest problem. Moving to a cost-plus model, in which the company would get extra payments when it could help slow drug price inflation, would be very beneficial for the company. It would also help relieve the constant pressure on drug reimbursement it faces year after year.
However, while Walgreens is actively working with PBMs and other payers to change its model, it won’t happen overnight. And PBMs have clearly shown that they have the upper hand.
In the meantime, it would make sense to sell some of its stake in VillageMD, as it was a failed investment that came from the company’s previous management team. Closing unprofitable stores is also a good decision. Walgreen’s balance sheet is loaded with debt, so paying down debt and returning to positive free cash flow is a priority.
Trading at a forward price-to-earnings (P/E) ratio of about 4 times, Walgreens finds itself in the bargain bin. However, its debt levels, lack of operating cash flow generation, and weakening operating performance are the reasons the stock is trading at current levels.
For patient investors, Walgreens is worth considering at current levels. The stock is cheap, and the company’s new CEO is now looking to make his mark on the pharmaceutical giant. Given its valuation, if it can stabilize its pharmacy margins and improve its cash flow profile, the company has strong turnaround potential. However, a turnaround is going to take time and, therefore, it may take time for investors to be rewarded for their patience.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the securities mentioned. The Mad Motley has a disclosure policy.
Walgreens Stock Slumps on Weak Outlook. Is now the time to buy? was originally published by The Motley Fool
