The stock is now trading at levels last seen in 1998.
Share prices of Walgreens Boots Alliance (WBA -0.78%) plunged following the June 27 release of its fiscal third-quarter earnings report, with the stock having one of its worst days on record. The stock price has now fallen more than 53% since the start of 2024.
Let's look at Walgreens' most recent quarterly report, why the stock plummeted, and whether now is the time to buy.
Reduced guidance, store closures, and new plan
For its fiscal Q3 (ended in May), Walgreens saw its revenue rise 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 rose 2.3% year over year, with same-store sales up 3.5%. Comparable pharmacy sales were up 5.7%, while comparable retail sales were down 2.3%. Adjusted operating income plunged 47.9% year over year to $501 million, hurt by weak retail sales and pharmacy reimbursem*nt pressures.
International sales rose 2.8% year over year. Boots UK sales grew 1.6%, with retail same-store sales up 6% and pharmacy same-store sales up 5.8%. Adjusted operating income slid 15.8% year over year to $175 million.
Revenue from its U.S. healthcare segment rose 7.6% year over year to $2.1 billion, with adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $23 million, an improvement from negative $113 million a year ago. VillageMD 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 in its U.S. retail pharmacy business fell to 17.7% from 19.1%. This shows how the company continues to get squeezed from pharmacy benefit managers over drug prices.
Walgreens generated negative $314 million in operating cash flow through 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 reduced its fiscal full-year adjusted EPS outlook to $2.80 to $2.95 from a prior forecast of $3.20 to $3.35. Management expects the challenging consumer environment and muted 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, with it set to examine about 25% of its unprofitable locations. The company also said it will make investments to improve 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 its shelves.
The company also plans to reduce its stake in VillageMD and no longer be its majority owner. However, it plans to keep its positions in Shields and Boots UK.
The company also remains in talks with pharmacy benefit managers (PBMs) and health issuers about creating a better reimbursem*nt system that will help stabilize its pharmacy margins and ensure fair payment.
Image source: Getty Images.
Is this dip an opportunity to buy the stock?
Reimbursem*nt rate pressures that continue to hurt Walgreens' margins and lower profitably remain its biggest problem. Shifting to a cost-plus model, where it would get additional payments when it can help slow the inflationary costs on drug prices, would greatly benefit the company. It would also help relieve the constant drug reimbursem*nt pressure it has seen year in and year out.
However, 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 hold the upper hand.
In the meantime, it is a good idea to sell off some of its VillageMD stake, as this was a failed investment idea that stemmed from the company's previous management team. Closing unprofitable stores is also the right move. Walgreen's balance sheet is loaded with debt, so paying off debt and returning to positive free cash flow is a priority.
Trading at about a 4 times forward price-to-earnings (P/E) ratio, Walgreens finds itself in the bargain bin. However, its debt load, lack of operating cash flow generation, and weakening operating performance are reasons the stock is trading at the current levels.
WBA PE Ratio (Forward) data by YCharts. PE Ratio = price-to-earnings ratio.
For patient investors, Walgreens is worth taking a chance on at current levels. The stock is cheap, and the company's new CEO is now looking to make his imprint on the pharmacy giant. Given its valuation, if he can stabilize its pharmacy margins and improve its cash flow profile, the company has a lot of turnaround potential. However, a turnaround is going to take a while, and as such, it may take time for investors to be rewarded for their patience.
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.
