Walgreens Plans to Shut Down 1,200 Branches and Anticipates Additional Significant Changes in the Business Sector
Walgreens Plans to Shut Down 1,200 Branches and Anticipates Additional Significant Changes in the Business Sector
Walgreens Boots Alliance (**WBA**-1.12%) is currently undergoing a major transformation under new CEO Tim Wentworth. Wentworth is aiming to enhance the company's financial health and make it a more enticing choice for long-term investors. However, this journey won't be easy given the rise in costs and intense competition.
By adopting a more streamlined approach and shutting down underperforming stores, Walgreens might manage to approach breakeven and improve its ability to consistently produce profits. Wentworth recently revealed that around 1,200 stores will be closed over the next few years, leaving the company with approximately 8,500 locations in the U.S.
Despite these measures, there are still numerous opportunities for Wentworth to further optimize the company's operations. It would not be surprising if there were additional significant changes announced in the future.
Walgreens' financials require significant improvement
A crucial metric for investors to focus on is Walgreens' operating margin. This represents the operating profit/loss as a percentage of revenue, which sits higher up the income statement than net income. As it excludes a considerable amount of noise that can distort earnings, it offers a better insight into how the company is performing from a day-to-day operations perspective.
Regrettably, Walgreens' operating margin has barely exceeded 3.5% over the past five years and has regularly dipped into the negative. With such poor margins, it is unsurprising that the company reduced its dividend earlier this year and is planning to close a significant number of locations.
For investors to feel confident in purchasing shares, they will require evidence of consistent profitability. However, based on the chart above, this seems like a tough challenge to overcome. By focusing on its more profitable locations, Walgreens can certainly make progress, but it may not be sufficient to address the issue fully.
Walgreens is exploring other avenues
Wentworth is considering various other options to help Walgreens further reduce costs. In recent years, the company has expanded into the healthcare sector with the introduction of primary care clinics at its outlets. This has the potential to attract more foot traffic and potentially enhance revenue. However, entering the healthcare sector is not cheap, and the low-cost leader Walmart's abandonment of its healthcare services plans demonstrates this.
Walgreens may also follow this path. The company is contemplating selling its specialty pharmacy business, Shields Health. Additionally, Walgreens is even considering selling its entire stake in VillageMD, the primary care company that was meant to be a vital part of its growth strategy in healthcare. Walgreens has already shut down underperforming clinics, and more closures may be on the horizon.
It wouldn't be a positive sign for Walgreens if it were to abruptly abandon its healthcare strategy, but with a new CEO leading the way who is not personally invested in this ambitious healthcare endeavor, it could be one of the significant moves Wentworth could make to reduce costs and simplify Walgreens' operations.
Is Walgreens stock a worthwhile investment today?
There are numerous potential actions Walgreens can take to improve its performance, making it an appealing contrarian play for some investors. However, the risk should not be underestimated.
Turnaround efforts can often fail, and with Walgreens grappling with intensified competition from Walmart and even Amazon expanding its pharmacy services, a reduction in store count and cost-cutting alone may not ensure Walgreens' long-term success as an investment. The company needs to prove to investors that it can not only compete against these giant players in the future but also deliver strong results and expand its operations.
At present, this achievement does not seem imminent, and until this changes, investors may be better off avoiding what remains a highly risky investment in Walgreens.
To boost its financial health and attract longer-term investors, Walgreens might consider diversifying its income streams through investments in areas like healthcare services. This could potentially increase revenue and reduce reliance on profit margins from retail sales.
Given the current financial challenges, Walgreens should consider strategic partnerships or divestments to raise capital and fund its transformation. For instance, selling parts of its specialty pharmacy business or primary care clinics could help the company allocate resources more effectively.