Is Your Favorite Pharmacy About To Go Belly Up?

Walgreens Boots Alliance stands at a critical juncture in the company’s 170-year history with revenues of $147 billion but a market capitalization of just $7 billion.

A heavily burdened balance sheet has been the prime culprit of the stock’s downfall but, under new CEO Tim Wentworth, management is undertaking an ambitious realignment aimed at stabilizing the core pharmacy business while taking the chop to some of its healthcare investments.

For investors, the future is a mixed bag, a double-sided coin so to speak, that could lead to massive upside or catastrophic failure, especially in light of recent financials and ongoing industry headwinds.

So, what does the future hold and will this former giant of healthcare end up shuttering its doors as the strains of excess debt plunge it to insurmountable depths?

Key Points

• Walgreens generates $147 billion in revenue but faces a heavy debt burden, a $7 billion market cap, and declining profitability under industry pressures.
• The company is closing 900-1,000 stores and cutting costs to stabilize its core business.
• Walgreens’ vast pharmacy network and 124-million-member loyalty program offer growth potential, but weak margins and modest revenue forecasts leave recovery uncertain.

5% Revenue Pop In Largest Segment

WBA’s fiscal 2024 results reflect the challenging operating environment, with adjusted operating income declining 32.2% to $2.6 billion despite 6.2% revenue growth to $147.7 billion.

The U.S. Retail Pharmacy segment, representing approximately 78% of total sales, saw revenue increase 5% but declined by a concerning 41.3% in adjusted operating income to $2.2 billion.

Total prescriptions filled reached 796.4 million, with 30-day equivalent prescriptions growing modestly at 2% on a comparable basis, suggesting stable market share but limited organic growth.

Pharmacy margins face significant pressure from PBM contract negotiations and Medicare reimbursement changes, though the company’s relationships with major payors, driving approximately 34% of consolidated sales, provide some stability.

The retail side of the business is also seeing challenges with sales tumbling 4.6% amid a difficult consumer environment and elevated shrink levels.

Up To 1,000 Store Closures Set To Boost Profitability

Management’s response to the various challenges centers on network optimization and healthcare services cost-cutting. The recently announced plan to close 900-1,000 underperforming stores is a decisive step toward improving profitability, with management expecting these closures to be accretive to adjusted operating income beginning in fiscal 2025.

This initiative follows the successful completion of the Transformational Cost Management Program, which delivered $4.5 billion in annual cost savings through fiscal 2024.

The healthcare services strategy requires particular scrutiny following the $12.4 billion VillageMD goodwill impairment.

While the U.S. Healthcare segment shows improving trends with adjusted EBITDA reaching $66 million, careful review of these assets may well lead to significant portfolio changes.

Management is open to major changes and that bodes well for the viability of the firm even if potentially it affects income-oriented shareholders who are dependent on the regular dividend payout.

Opioid Settlements Are Dragging The Balance Sheet Down

WBA has made meaningful progress strengthening its balance sheet, reducing net debt by nearly $2 billion and lease obligations by over $1 billion in fiscal 2024.

The 48% reduction in quarterly dividend payments preserves approximately $800 million annually for debt reduction and key investments.

Current liquidity remains solid with $3.2 billion in cash and marketable securities, though the company faces substantial obligations including $6.6 billion in opioid settlement payments over 15 years and $970 million to $1 billion in UK pension funding requirements.

Walgreen’s Has Some Innate Advantages

WBA’s market standing builds on several structural advantages within the pharmacy landscape. The company’s network reaches a whopping 78% of the U.S. population, providing healthcare access points in thousands of communities.

Another string in the bow is the myWalgreens loyalty program that has accumulated an astonishing 124 million members and created stronger customer relationships as well as data insights that will likely be mined over time by artificial intelligence.

The relationship with Cencora further supports purchasing power and supply chain efficiencies, while strong brand recognition through the Walgreens and Boots banners supports customer trust and retention.

So what does this all mean for the stock?

Will Walgreens Stock Go Bust?

Walgreens has a weak balance sheet and mounting losses but management has shut over 1,000 stores in order to save on costs and ensure it does not go bust.

At the moment analysts are leaning positively as far as the share price is concerned with a consensus price target of $10.81 per share sitting on the horizon.

Obviously the company’s 12.05% dividend is highly appetizing but the company operates with a significant debt burden that calls into question the sustainability of the dividend and its 48 year growth streak.

Bearish sentiment has grown recently with 3 analysts forecasting that the upcoming earnings period will be poorer than first forecast.

That’s not entirely a surprise given that on $147 billion in sales, Walgreens posted a near $15 billion loss and looking to the future revenues are only expected to climb by a modest 1% annually over the next 5 years while no signs of profitability turning the corner are evident.

Still, for the bargain hunter there are things to cling onto such as the very low price-to-sales multiple that is near 0 because this $147 billion revenue-generating company trades at a market cap of just $7 billion. Any signs of a positive and trusted turnaround could spark enthusiasm among Wall Street but for now the best guidance may well be that the trend is your friend and until WBA share price bucks the downtrend it’s hard to get overly optimistic about the firm’s prospects.