Analyzing Walgreens: Is It Time to Invest in a Comeback?

Walgreens Boots Alliance: A Shift in Fortune?

Walgreens Boots Alliance Inc (NASDAQ: WBA) recently experienced a notable surge, climbing approximately 27% in a single day following the release of its positive fiscal first quarter earnings report. This unexpected leap has caught the attention of investors, especially considering the company's challenging past as the worst performer on the S&P 500. Over the last year, Walgreens has witnessed a staggering 54% decline in its stock value, prompting many to question if this is the beginning of a turnaround or simply a momentary spike.

The struggles of Walgreens are not limited to just one year. The company has been on a downward trend for most of the last decade. Since reaching a peak of $97 per share back in 2015, Walgreens has grappled with a significant loss of value, with its stock now trading around $11.50 per share. This downward trajectory has led many to speculate whether the stock has finally hit rock bottom, prompting discussions about potential investment opportunities.

Assessing the Recent Earnings Report

The recent earnings report for Walgreens highlights a mixed bag of progress and setbacks. The company reported a 7.5% increase in sales, totaling $39.5 billion, surpassing analysts' forecasts. However, this positive news was accompanied by a net loss of $265 million, or 31 cents per share, which exceeded prior losses from the same quarter last year. Although adjusted earnings per share reached 51 cents, outperforming estimates, they still lagged behind last year’s figures of 66 cents per share.

This pronounced net loss is primarily attributed to the expenses related to the Footprint Optimization Program. Although this program has incurred short-term costs, it plays a critical role in Walgreens' strategic plan to reduce expenses, improve cash flow, and optimize its retail presence for future sustainability. A significant aspect of this plan is the closure of 1,200 stores out of its 8,500 locations over the next three years. In the recent quarter alone, 67 stores were shuttered as part of this transition.

“Our first quarter results reflect our disciplined execution against our 2025 priorities: stabilizing the retail pharmacy by optimizing our footprint, controlling operating costs, improving cash flow and continuing to address reimbursement models,” stated Tim Wentworth, CEO of Walgreens Boots Alliance. The commitment to a retail pharmacy-led model emphasizes the necessity for time and patience as the company navigates its transformation.

Walgreens operates three main business segments: U.S. retail pharmacy, its largest division, international sales, and U.S. healthcare services. Notably, the pharmacy segment generated $30.9 billion in sales, a 7% increase, yet operating income saw a significant reduction of 36% to $441 million. Conversely, the international segment reported a 10% increase in sales, rising to $6.4 billion, while operating income grew by 18% to $168 million. The U.S. healthcare division, encompassing providers like VillageMD and CareCentrix, marked a commendable 12% increase in sales, bringing in $2.2 billion, alongside a turnaround in operating income.

Considering Investment in Walgreens Stock

While Walgreens did not outline specific sales guidance in its earnings announcement, it maintained its previous full-year guidance for 2025, aiming for adjusted earnings per share between $1.40 and $1.80. Continuous growth is anticipated in U.S. healthcare and international markets, but with a projected decline in U.S. retail pharmacy sales. The consensus estimate aligns with this guidance, positioning adjusted earnings at around $1.58 per share.

A part of Walgreens' overall strategy involves initiatives projected to yield an additional $100 million in adjusted operating income by 2025 through cost optimization. The overarching goal is to establish a sustainable, retail pharmacy-led model that enhances profitability.

However, uncertainty looms over Walgreens' future, particularly concerning the speculation that private equity firm Sycamore Partners may attempt to acquire Walgreens and take the company private. While this prospective acquisition wasn't addressed in the recent earnings release, it has stirred concern among analysts. Morgan Stanley indicated that facilitating such a buyout might prove complicated without engaging more partners in the endeavor.

Despite not receiving any upgrades following the earnings call, Walgreens remains an intriguing consideration for investors. The stock is currently valued at a P/E ratio of 5 and has a price-to-book ratio of 0.76, suggesting it is extremely undervalued. Although the potential for long-term gains exists, it may be prudent to await further developments regarding the buyout discussions and clearer insights into the ongoing turnaround strategy before making investment decisions.

Frequently Asked Questions

What is Walgreens' recent stock performance?

Walgreens stock surged approximately 27% following a positive fiscal first quarter earnings report, but it has faced significant declines in the past year, totaling 54%.

What are Walgreens' main business segments?

Walgreens operates three main segments: U.S. retail pharmacy, international sales, and U.S. healthcare services, with the pharmacy segment being the largest.

What challenges is Walgreens facing?

Walgreens is experiencing financial losses primarily from restructuring efforts and adaptation of its operational model, which involves closing numerous stores to optimize its footprint.

What guidance has Walgreens provided for the future?

Walgreens has reiterated its full-year 2025 adjusted earnings per share guidance, predicting figures between $1.40 and $1.80, while anticipating growth in healthcare and international markets.

Is Walgreens stock considered a good investment?

While Walgreens stock is undervalued, potential investors might want to wait for further developments regarding management transitions and effectiveness of its turnaround strategy before investing.

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