Walgreens Boots Alliance Inc (NASDAQ:WBA) was skyrocketing on Friday, jumping some 27% after the pharmacy retailer released a positive fiscal first quarter earnings report.
Indeed, good news for Walgreens has been few and far between, as it was the worst performing stock on the S&P 500 and Dow Jones Industrial Average last year, and is down some 54% over the past 12 months.
The decline of Walgreens is not just a one-year event; it has been dropping for most of the past 10 years. Since 2015, when it reached a high of $97 per share, Walgreens stock has been in freefall, with negative returns in nine of the next 10 years.
The stock is currently trading at about $11.50 per share during Friday’s surge, down almost 90% from 2015. Has Walgreens stock finally bottomed out? Is this finally the right time to buy Walgreens stock?
“Turnaround will take time”
Walgreens made strides toward turning things around in its fiscal first quarter, as sales increased 7.5% to $39.5 billion. That easily bested analysts’ estimates of $37.4 billion in sales.
The pharmacy chain posted a net loss of $265 million, or 31 cents per share, which was worse than the $67 million net loss, or 8 cents per share, in the same quarter a year ago. On an adjusted basis, earnings were 51 cents per share, which was also below the 66 cents adjusted EPS a year ago, but well beyond estimates of 37 cents per share.
The higher net loss was due to its Footprint Optimization Program and the costs associated with this restructuring plan. But the plan is also the key to Walgreens turnaround, as it seeks to lower costs, improve cash flow, and optimize its footprint over the long term.
Overall, the plan calls for closing 1,200 of its 8,500 Walgreens stores over the next three years. Further, some 500 stores are expected to close in fiscal 2025. In the fiscal first quarter, 67 stores were closed.
“Our first quarter results reflect our disciplined execution against our 2025 priorities: stabilizing the retail pharmacy by optimizing our footprint, controlling operating costs, improving cash flow and continuing to address reimbursement models,” Tim Wentworth, CEO of Walgreens Boots Alliance, said. “While our turnaround will take time, our early progress reinforces our belief in a sustainable, retail pharmacy-led operating model.”
Walgreens has three main business segments – U.S. retail pharmacy, its largest; international; and U.S. healthcare.
The pharmacy business generated $30.9 billion in sales, up 7%, but operating income was just $441 million, down 36%. The international business grew sales 10% to $6.4 billion and operating income increased 18% to $168 million. The U.S. healthcare arm, which includes VillageMD and CareCentrix, saw sales rise 12% to $2.2 billion, while adjusted operating income was $25 million, up from a $96 million net loss a year ago.
Is Walgreens stock a buy?
Walgreens did not provide sales guidance in its earnings report, but it did reiterate its previous full-year 2025 guidance, targeting adjusted EPS at $1.40 to $1.80. It expects continued growth in U.S. Healthcare and International, offset by a decline in U.S. Retail Pharmacy. The consensus estimate is $1.58 per share, which is right at the midpoint of the guidance.
In terms of its cost-cutting initiative, the company expects $100 million in adjusted operating income accretion in 2025 through its footprint optimization. The goal remains to create a retail pharmacy-led operating model with a disciplined and sustainable economic model.
Clouding Walgreens’ future is the news in December that Walgreens was in talks with private equity firm Sycamore Partners. Sycamore was reportedly looking to buy Walgreens and take it private. Walgreens did not discuss this in its Q1 materials nor was it anticipated to be addressed on the earnings call.
But Morgan Stanley (NYSE:MS) analysts said back in December that a private equity buyout was hard to contemplate without additional partners.
Walgreens stock did not get any upgrades as of Friday morning, but that may come next week after the earnings call. The price target is at around $10 per share, which would suggest little movement.
Walgreens stock is dirt cheap with a P/E of 5 and price-to-book ratio of 0.76. While it could be a good long-term play at this valuation, I’d wait for more news on the potential buyout and more visibility on the turnaround plan. Turnarounds indeed take time, and this could be awhile.