On Wednesday, Deutsche Bank adjusted its outlook on Walgreens Boots Alliance (NASDAQ:WBA), lowering the price target to $10.00 from the previous $11.00 while maintaining a Hold rating on the stock. The revision followed Walgreens' recent financial performance and future guidance, which has raised some concerns among analysts.
Walgreens reported a slight beat in its fiscal fourth quarter but provided a 2025 outlook that did not impress market expectations, leading to a surprising approximate 15% increase in share value. The company's guidance for adjusted earnings per share (EPS) by 2025 is set to be between $1.40 and $1.80, which is in line with the more pessimistic market estimates around $1.73. This projection takes into account ongoing reimbursement rate pressures, a difficult consumer environment, and growth in both the U.S. Healthcare and International segments.
The company's revenue forecast for its U.S. retail pharmacy business is particularly ambitious, considering the planned closure of about 500 stores next year. Walgreens expects to generate revenue of $115 billion to $118 billion for this segment, surpassing the consensus estimate of $113.7 billion. However, the segment's operating income is anticipated to drop significantly, from approximately $2.2 billion this year to between $0.9 billion and $1.2 billion next year, which is below the consensus of $1.4 billion.
Despite the strong performance of its International segment, with robust growth in Germany and the Boots chain, and the U.S. Healthcare segment turning adjusted EBITDA positive with disciplined growth, the bank expressed reservations about the core retail business's turnaround. The bank emphasized that significant improvements on a per store basis would be necessary for Walgreens to meet its financial targets amid the uncertainties.
In other recent news, Walgreens Boots Alliance has reported a decline in adjusted earnings per share (EPS) for the fourth quarter of 2024, with a 41% year-over-year decrease to $0.39. The full-year adjusted EPS also saw a 28% decline to stand at $2.88.
The company has announced plans to close approximately 1,200 underperforming stores over the next three years, a strategy aimed at stabilizing operations amid challenging market conditions. TD Cowen maintained its Buy rating and $16.00 price target for Walgreens, emphasizing the company's proactive measures in addressing key concerns and the anticipated $100 million benefit to adjusted operating income (AOI) by fiscal year 2025.
TD Cowen also noted that the cash requirements estimated at approximately $160 million to cover potential negative free cash flow (FCF) in FY25 are lower than many had anticipated. Furthermore, Walgreens has other assets and a revolving credit facility that could cover short-term cash needs. The company's fiscal 2025 adjusted EPS guidance is set between $1.40 and $1.80, and it anticipates a $150 million reduction in capital expenditures.
Walgreens is also targeting $500 million in working capital initiatives for fiscal 2025, expecting to generate approximately $500 million in free cash flow. Despite a net loss of $8.6 billion in GAAP results, the U.S. Retail Pharmacy segment saw comparable sales rise by 8.3%, and the US Healthcare segment exceeded expectations with $66 million in adjusted EBITDA.
InvestingPro Insights
Recent data from InvestingPro sheds additional light on Walgreens Boots Alliance's financial situation. The company's market capitalization stands at $9 billion, reflecting the market's current valuation of the firm. Walgreens' revenue for the last twelve months as of Q4 2024 was $147.66 billion, with a growth rate of 6.17%, indicating some positive momentum in sales despite the challenges outlined in the article.
However, the company's profitability metrics paint a more complex picture. The adjusted P/E ratio of -3.49 suggests that Walgreens is currently operating at a loss, which aligns with the concerns raised about the company's earnings outlook. This is further supported by the negative basic EPS of -$10.01 for the same period.
InvestingPro Tips highlight additional aspects of Walgreens' financial health:
1. Walgreens has a high dividend yield of 9.6%, which may be attractive to income-focused investors. However, this should be viewed cautiously in light of the company's negative earnings.
2. The company's stock is trading at a low Price to Book ratio of 0.75, potentially indicating that it is undervalued relative to its assets.
These insights, along with 13 additional tips available on InvestingPro, provide a more comprehensive view of Walgreens' financial position and market performance. The data and tips from InvestingPro offer valuable context to the Deutsche Bank analysis, helping investors better understand the challenges and potential opportunities facing Walgreens Boots Alliance.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.