Walgreens Boots Alliance: Signs of Recovery After Q4 Earnings Surprise
Shares of Walgreens Boots Alliance (NASDAQ: WBA) experienced a significant surge following its unexpected earnings report for the fiscal fourth quarter, which concluded on September 30. The pharmacy retailer not only reported a sales increase but also provided optimistic guidance thanks to several new restructuring efforts.
This news comes as a relief to investors, as Walgreens’ stock had plummeted, losing more than half of its value this year. If the company successfully navigates its way toward sustainable long-term growth, its shares could potentially become a strong investment moving forward.
Early Signs of a Turnaround for Walgreens
Walgreens has faced numerous challenges, both in the economy and within the industry. A surge in online pharmacies and e-commerce competition has contributed to weak sales over the past decade. Additionally, rising costs and decreasing insurance reimbursement rates have squeezed profit margins and earnings.
On top of that, the company has been embroiled in various lawsuits regarding its involvement in the opioid crisis, leading to billions in settlements. These issues have heavily influenced Walgreens’ stock performance.
However, the recent earnings report highlighted some promising trends, indicating that core operations may be stabilizing.
In Q4, Walgreens achieved net sales of $37.5 billion, a 6% increase year over year, surpassing Wall Street’s average forecast of approximately $35.8 billion. Adjusted earnings per share (EPS) were reported at $0.39, which, while above market expectations, still represented a 41% decline from Q4 2023 due to weak margins, particularly with a 1.7% drop in comparable sales for the retail business.
This revenue growth was particularly driven by an 11.7% increase in comparable sales within the U.S. pharmacy division, supported by a favorable sales mix and higher pricing. The smaller U.S. Healthcare division also provided a positive contribution. Internationally, the Boots UK group distinguished itself with significant online sales growth this year.
A noteworthy development was the introduction of a substantial “footprint optimization program” aimed at enhancing profitability. Walgreens plans to close 1,200 stores over the next three years, focusing on underperforming locations and those with expiring leases among its more than 12,500 stores. Management anticipates that this initiative will immediately improve cash flow and strengthen the balance sheet.
For fiscal 2025, Walgreens projects annual sales growth of about 1% as it continues to build on recent momentum. Its EPS target for 2025 is set between $1.40 and $1.80, compared to $2.88 in 2024, representing a transitional phase for the company as it concentrates on its core strengths.
Image source: Getty Images.
Investor Sentiment on Walgreens Stock
I am cautiously optimistic about Walgreens’ strategy to enhance its financial situation through a streamlined operating model. The objective of achieving consistently higher profit margins is encouraging for investors, especially after a significant shift in expectations.
While Walgreens may not quickly return to its peak earnings from the last decade, it is important to note that the underlying business remains profitable and generates positive cash flow.
A key area of uncertainty is the future of Walgreens’ dividend payout. The current quarterly rate of $0.25, yielding 10%, raises questions about its sustainability. During the recent earnings call, CEO Tim Wentworth suggested a possible review of the company’s capital allocation strategy, noting that “everything is on the table.”
From my perspective, Walgreens shares now appear more appealing for their upside potential rather than as a high-yield investment. The stock trades at just seven times management’s full-year EPS target, resulting in a forward price-to-earnings (P/E) ratio that reflects compelling value. If the turnaround strategy bears fruit in the coming quarters, it could serve as a catalyst for stock price appreciation.
While uncertainties remain for Walgreens to regain investor confidence, my stance on the stock is cautiously optimistic. For long-term investors, establishing a small position through a dollar-cost-averaging approach could mitigate volatility risk and fit well within a diversified portfolio.
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Dan Victor 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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
