Walgreens' Shares Plummet Due to Pessimistic Projections; Considering Purchase Now an Opportunity?
Walgreens' Shares Plummet Due to Pessimistic Projections; Considering Purchase Now an Opportunity?
Walgreens Boots Alliance's (WBA) share price dived following its third-quarter earnings report release on June 27, 2025. The stock has seen a drastic decrease, with over 53% of its value lost since the start of the year. So, let's delve into the reasons why WBA's stock plummeted and whether now is the opportune moment to invest.
Q3 Performance and Future Outlook
For its third quarter that ended in May, Walgreens' revenue increased by 2.6% year-on-year, reaching $36.4 billion. However, adjusted earnings per share (EPS) took a hit, falling 36.5% to $0.63. U.S. retail pharmacy sales grew by 2.3%, while comparable pharmacy sales soared 5.7%. On the other hand, corresponding retail sales dipped 2.3%. Adjusted operating income plummeted 47.9% year-on-year to $501 million, due to weak retail sales and pharmacy reimbursement pressures.
International sales saw a 2.8% rise, with Boots UK sales expanding by 1.6%. Retail same-store sales climbed 6%, while pharmacy same-store sales spiked 5.8%. Adjusted operating income dipped 15.8% year-on-year to $175 million.
Revenue from the U.S. healthcare segment grew 7.6% year-on-year to $2.1 billion. Adjusted EBITDA improved to $23 million, compared to negative $113 million the previous year. VillageMD revenue expanded by 7%, with Shields revenue surging 24%.
Gross margins slipped to 17.8% from 18.6% the prior year. This is a consequence of the company being squeezed further by pharmacy benefit managers regarding drug prices. WBA reported negative $314 million in operating cash flow and a staggering negative $1.4 billion in free cash flow during the first nine months of the year. The company ended the quarter with $8.9 billion in debt and $703 million in cash.
Looking ahead, the company revised its fiscal full-year adjusted EPS outlook to $2.80 to $2.95, down from $3.20 to $3.35 earlier. Management expects the challenging consumer environment and muted prescription volume growth to persist into 2026.
Store Closures and Reinvestment Plans
As a consequence, WBA plans to close a substantial portion of its 8,700 U.S. locations over the next three years, focusing on examination of around 25% of its unprofitable locations. The company also intends to improve customer and patient experiences by accelerating its digital and omnichannel offerings, building a loyalty program, and reducing the number of brands and SKUs on its shelves.
WBA will also reduce its stake in VillageMD and no longer hold the majority ownership. However, it plans to maintain its positions in Shields and Boots UK. The company remains in talks with pharmacy benefit managers (PBMs) and health issuers about establishing a better reimbursement system that will help alleviate pharmacy margins' constant pressure and ensure fair payment.
Is this a Buying Opportunity?
Walgreens' continuous reimbursement rate pressures and their effect on profits remain its primary issues. Shifting to a cost-plus model that provides additional payments when the company can slow inflationary drug prices' impact would greatly benefit the company, alleviating constant drug reimbursement pressure.
While WBA is actively collaborating with PBMs and other payers to modify the model, this won't occur overnight, and PBMs clearly show their dominance.
WBA is trading at around a 4 times forward Price to Earnings (P/E) ratio, positioning it in the value sector. However, its hefty debt load, lack of operating cash flow generation, and weakening operating performance are reasons for the stock's current value.
For patient investors, WBA appears compelling at the current prices, but exercising caution is advisable. The company's new CEO is planning to make his mark on the pharmacy giant, and, provided he can stabilize pharmacy margins and enhance its cash flow profile, WBA has remarkable turnaround potential. However, it may take time for investors to reap rewards for their patience as the turnaround process progresses.
In light of Walgreens Boots Alliance's (WBA) Q3 performance showing a decrease in adjusted EPS and increased debt, some investors might question whether this is a good time for investing in the company's stock. Despite WBA's plans to close unprofitable locations and focus on digital transformation, its current financial struggles and reliance on improving pharmacy reimbursement models could pose challenges in the near future.
To mitigate pharmacy reimbursement pressures and stabilize margins, WBA is collaborating with pharmacy benefit managers and health issuers to modify the payment model. However, any changes in the reimbursement system may not materialize immediately, and the pharmacy industry's dominant players might not readily accept altered payment structures.