Stock prices of Walgreens Boots Alliance (NASDAQ: WBA) fell after the release of fiscal third-quarter results on June 27, with the stock having one of its worst days ever. The share price is now down more than 53% since the start of 2024.
Let’s take a look at Walgreens’ most recent quarterly report, why the stock price fell, and whether now is the time to buy.
Reduced guidelines, store closures and new plan
For fiscal quarter 3 (ended in May), Walgreens saw its 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. pharmacy sales rose 2.3% year over year, with same-store sales up 3.5%. Comparable pharmacy sales rose 5.7%, while comparable retail sales fell 2.3%. Adjusted operating income fell 47.9% year over year to $501 million, hit by weak retail sales and pharmacy reimbursement pressure.
International sales increased 2.8% year-on-year. Boots UK revenue grew 1.6%, with same-store retail sales up 6% and same-store pharmacy sales up 5.8%. Adjusted operating profit fell 15.8% year-on-year to $175 million.
U.S. healthcare segment revenue rose 7.6% year over year to $2.1 billion, with adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $23 million, up from negative $113 million a year ago. VillageMD revenue grew 7% year over year, while Shields revenue rose 24%.
Gross margins fell to 17.8% from 18.6% a year ago. Gross margins at the U.S. retail pharmacy fell to 17.7% from 19.1%, showing how the company continues to face pressure from pharmacy benefit managers over drug prices.
Walgreens generated negative $314 million in operating cash flow in the first nine months of the year and negative $1.4 billion in free cash flow. It ended the quarter with $8.9 billion in debt and $703 million in cash.
Looking ahead, the company lowered its full-year fiscal year adjusted earnings per share (EPS) outlook to $2.80 to $2.95 from a previous forecast of $3.20 to $3.35 . Management expects the challenging consumer environment and muted script volume growth 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, while examining approximately 25% of its unprofitable locations. The company also said it will invest to improve the customer and patient experience, such as accelerating its digital and omnichannel offerings, building its loyalty program and reducing the number of brands and SKUs on 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 is also still in discussions with pharmacy benefit managers (PBMs) and health insurers about setting up a better reimbursement system to stabilize pharmacy margins and ensure fair payment.
Is this decline an opportunity to buy the stock?
The pressure on reimbursement rates that continues to hurt Walgreens’ margins and reduce profitability remains the biggest issue. Switching to a cost-plus model, where it would get extra payments if it could help slow the inflationary cost of drug prices, would benefit the company tremendously. It would also help alleviate the constant pressure on drug reimbursement that exists year in and year out.
While Walgreens is actively working with PBMs and other payers to change the model, this won’t happen overnight. And the PBMs have clearly shown that they have the upper hand.
In the meantime, it’s a good idea to sell some of its VillageMD stake, as that was a failed investment idea that came out of the company’s previous management team. Closing unprofitable stores is also the right move. Walgreen’s balance sheet is loaded with debt, so paying down debt and returning to positive free cash flow is a priority.
Walgreens trades at a price-to-earnings ratio of about four times its price-to-earnings ratio and is in the bargain bin. However, the debt burden, lack of operating cash flow and weakening operating performance are reasons why the stock is trading at current levels.
For patient investors, Walgreens is worth taking a chance at current levels. The stock is cheap and the company’s new CEO now wants to make his mark on the pharmacy giant. Given the valuation, if he can stabilize pharmacy margins and improve the cash flow profile, the company has a lot of potential for a turnaround. However, a turnaround will take a while and as such it may take some time before investors are 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 stocks mentioned. The Motley Fool has a disclosure policy.
Walgreens shares tumble on weak outlook. Is it time to buy now? was originally published by The Motley Fool
