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WBA Stock Up 16% on New Restructuring Strategy: How to Play the Stock
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Yesterday, Walgreens Boots Alliance (WBA - Free Report) shares jumped nearly 16% following the company’s better-than-expected earnings and sales results for the fourth quarter of fiscal 2024. Despite the company reporting a significant year-over-year decline in earnings, the growing investors’ optimism was backed by the company’s announcement of a strategic plan to close nearly 1200 stores over the next three years to improve the bottom-line scenario and cash flow.
Over the past 30 days, this pharmacy retail powerhouse, despite all its financial challenges, managed to witness a substantial 15.1% rise in share price compared to the S&P 500’s climb of 3.9% and the Retail Drug Store subindustry’s rise of 14.9%. The company also outperformed its direct peers like CVS Health (CVS - Free Report) and Herbalife (HLF - Free Report) during this period.
One-Month Price Comparison
Image Source: Zacks Investment Research
WBA's Q4 Results - Challenges Offsetting Gains
The fiscal fourth-quarter results of Walgreens Boots particularly replicated the ongoing pressure on the U.S. retail pharmacy space, partly offset by growth in the company’s U.S. healthcare segment. Meanwhile, international business continued to perform in line with the company’s expectations.
Within the U.S. retail pharmacy segment, comparable sales grew 8.3% year on year, despite a decline in retail sales. adjusted operating income decreased 60% year over year. Approximately two thirds of this decline was related to lower sale leaseback gains, lapping the reversal of incentive accruals in the prior year and lower Cencora equity income.
However, the headwinds were partly offset by the company’s successful execution of cost-saving initiatives. In fiscal 2024, WBA exceeded its goal of $1 billion in cost savings for the year, with most of the benefit recognized in the U.S. retail pharmacy segment.
Pharmacy-adjusted gross margin declined in the fiscal fourth quarter, negatively impacted by net reimbursement pressure, brand inflation and mix impacts. Recent fluctuations in NADAC had an impact of $17 million in the quarter compared to the prior year.
The U.S. healthcare segment sales increased 7% compared to the prior-year quarter. VillageMD sales grew 7% year on year, driven by growth in full-risk lives and fee-for-service revenue, partly offset by the impact of clinic closures. Shields sales were up 28%, driven by growth within existing partnerships.
Adjusted EBITDA for the fourth quarter was $65 million, an improvement of $94 million compared to last year, driven by cost discipline at VillageMD and growth from Shields.
Revenues in the International division rose 3.7% at CER in the fiscal fourth quarter. In Germany, wholesale business sales increased 8.2% in the fiscal fourth quarter. Boots UK sales rose 2.3% year over year. Boots UK’s comparable retail sales advanced 6.2%. Further, Boots UK’s comparable pharmacy sales rose 10% year over year.
Adjusted EPS of 39 cents decreased 41% year over year at CER. Approximately 70% of this decline relates to lower sale-leaseback gains, lapping the reversal of incentive accruals in the prior year and lower Cencora equity income.
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
Operating cash flow of $1 billion for fiscal 2024 was negatively impacted by $934 million in payments related to legal matters and $386 million in annuity premium contributions related to the Boots pension plan.
Meanwhile, WBA exceeded its target of $600 million in capital expenditure reductions in fiscal 2024, delivering $736 million in savings versus fiscal 2023. Similarly, the company also exceeded its target of $500 million of benefits from working capital initiatives in fiscal 2024.
New Footprint Optimization Program of WBA Raises Optimism
The company is currently putting an all-out effort to reform its pharmacy model by aggressively liquidating its unprofitable stores and businesses.
To improve the company’s cash position, WBA yesterday announced a significant restructuring plan. Under this plan, the company aims to close approximately 1,200 stores over the next three years, with about 500 targeted to close in fiscal 2025. Walgreens Boots is prioritizing closing locations that are cash flow negative. Underperforming stores where the company owns the locations and stores where the lease expirations are due in the next few years are the primary targets.
This apart, the company is also working on plans to exit the VillageMD business to focus more on core growth.
If these plans get properly executed, Walgreens Boots, while streamlining its business, can also strategically reduce its debt level. The company yesterday noted that the implementation of the Footprint Optimization Program will be immediately accretive to adjusted EPS and free cash flow.
WBA Shares Are Cheap
In terms of valuation, WBA’s forward 12-month price-to-earnings (P/E) is 6.02X, a discount to the industry's average of 8.72X. This suggests that investors may be paying a lower price relative to the company's expected earnings growth.
Image Source: Zacks Investment Research
Industry-wide Issues Continue to Remain Challenging for WBA
Difficult Drug Retailing Scenario: Brand-name drugs with wide profit margins are protected by a reliable supply chain. However, low-margin generic drugs, which have a fragile supply chain network, have been bearing the brunt of the ongoing economic slump. Drug retailers are also witnessing a constant rise in medicine prices stemming from the rising cost of raw materials. The industry players are currently grappling with continued pressure from non-reimbursable pharmacy expenses, which are significantly pulling down mass demand for prescription as well as over-the-counter drugs and vaccinations.
U.S. Pharmacy Business Drabs: Walgreens Boots is currently facing significant challenges within the company’s U.S. Retail Pharmacy segment, stemming from an unfavorable consumer environment and adverse pharmacy industry trends. The company, in this regard, noted that customers have become increasingly selective and price-sensitive in their purchases. Despite several planned measures being taken, the company does not expect an immediate improvement within the U.S. retail business as the operating environment might continue to remain challenging.
Although WBA is currently trading above its 50-day moving average, driven by the immediate boost following the earnings release, the stock is still trading much lower than its 200-day moving average, indicating the possibility of a further bearish shift in the stock's price.
WBA Below 200-Day SMA
Image Source: Zacks Investment Research
Wait for a Better Entry Point
Walgreens Boots’ recent footprint optimization program seems to act effectively to improve the company’s financial health. Yet, looking at the company’s near-term outlook, the ongoing business hiccups and industry-wide issues might not get resolved in the rest of the calendar year 2024. Accordingly, despite the stock trading near its 52-week low of $8.22 at present, this might not be the ideal time to invest in WBA. Those who already own this Zacks Rank #5 (Strong Sell) stock may even consider getting rid of it for the time being and wait till the company's financial stability starts to offer potential pathways to recovery.
Image: Bigstock
WBA Stock Up 16% on New Restructuring Strategy: How to Play the Stock
Yesterday, Walgreens Boots Alliance (WBA - Free Report) shares jumped nearly 16% following the company’s better-than-expected earnings and sales results for the fourth quarter of fiscal 2024. Despite the company reporting a significant year-over-year decline in earnings, the growing investors’ optimism was backed by the company’s announcement of a strategic plan to close nearly 1200 stores over the next three years to improve the bottom-line scenario and cash flow.
Over the past 30 days, this pharmacy retail powerhouse, despite all its financial challenges, managed to witness a substantial 15.1% rise in share price compared to the S&P 500’s climb of 3.9% and the Retail Drug Store subindustry’s rise of 14.9%. The company also outperformed its direct peers like CVS Health (CVS - Free Report) and Herbalife (HLF - Free Report) during this period.
One-Month Price Comparison
Image Source: Zacks Investment Research
WBA's Q4 Results - Challenges Offsetting Gains
The fiscal fourth-quarter results of Walgreens Boots particularly replicated the ongoing pressure on the U.S. retail pharmacy space, partly offset by growth in the company’s U.S. healthcare segment. Meanwhile, international business continued to perform in line with the company’s expectations.
Within the U.S. retail pharmacy segment, comparable sales grew 8.3% year on year, despite a decline in retail sales. adjusted operating income decreased 60% year over year. Approximately two thirds of this decline was related to lower sale leaseback gains, lapping the reversal of incentive accruals in the prior year and lower Cencora equity income.
However, the headwinds were partly offset by the company’s successful execution of cost-saving initiatives. In fiscal 2024, WBA exceeded its goal of $1 billion in cost savings for the year, with most of the benefit recognized in the U.S. retail pharmacy segment.
Pharmacy-adjusted gross margin declined in the fiscal fourth quarter, negatively impacted by net reimbursement pressure, brand inflation and mix impacts. Recent fluctuations in NADAC had an impact of $17 million in the quarter compared to the prior year.
The U.S. healthcare segment sales increased 7% compared to the prior-year quarter. VillageMD sales grew 7% year on year, driven by growth in full-risk lives and fee-for-service revenue, partly offset by the impact of clinic closures. Shields sales were up 28%, driven by growth within existing partnerships.
Adjusted EBITDA for the fourth quarter was $65 million, an improvement of $94 million compared to last year, driven by cost discipline at VillageMD and growth from Shields.
Revenues in the International division rose 3.7% at CER in the fiscal fourth quarter. In Germany, wholesale business sales increased 8.2% in the fiscal fourth quarter. Boots UK sales rose 2.3% year over year. Boots UK’s comparable retail sales advanced 6.2%. Further, Boots UK’s comparable pharmacy sales rose 10% year over year.
Adjusted EPS of 39 cents decreased 41% year over year at CER. Approximately 70% of this decline relates to lower sale-leaseback gains, lapping the reversal of incentive accruals in the prior year and lower Cencora equity income.
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
Operating cash flow of $1 billion for fiscal 2024 was negatively impacted by $934 million in payments related to legal matters and $386 million in annuity premium contributions related to the Boots pension plan.
Meanwhile, WBA exceeded its target of $600 million in capital expenditure reductions in fiscal 2024, delivering $736 million in savings versus fiscal 2023. Similarly, the company also exceeded its target of $500 million of benefits from working capital initiatives in fiscal 2024.
New Footprint Optimization Program of WBA Raises Optimism
The company is currently putting an all-out effort to reform its pharmacy model by aggressively liquidating its unprofitable stores and businesses.
To improve the company’s cash position, WBA yesterday announced a significant restructuring plan. Under this plan, the company aims to close approximately 1,200 stores over the next three years, with about 500 targeted to close in fiscal 2025. Walgreens Boots is prioritizing closing locations that are cash flow negative. Underperforming stores where the company owns the locations and stores where the lease expirations are due in the next few years are the primary targets.
This apart, the company is also working on plans to exit the VillageMD business to focus more on core growth.
If these plans get properly executed, Walgreens Boots, while streamlining its business, can also strategically reduce its debt level. The company yesterday noted that the implementation of the Footprint Optimization Program will be immediately accretive to adjusted EPS and free cash flow.
WBA Shares Are Cheap
In terms of valuation, WBA’s forward 12-month price-to-earnings (P/E) is 6.02X, a discount to the industry's average of 8.72X. This suggests that investors may be paying a lower price relative to the company's expected earnings growth.
Image Source: Zacks Investment Research
Industry-wide Issues Continue to Remain Challenging for WBA
Difficult Drug Retailing Scenario: Brand-name drugs with wide profit margins are protected by a reliable supply chain. However, low-margin generic drugs, which have a fragile supply chain network, have been bearing the brunt of the ongoing economic slump. Drug retailers are also witnessing a constant rise in medicine prices stemming from the rising cost of raw materials. The industry players are currently grappling with continued pressure from non-reimbursable pharmacy expenses, which are significantly pulling down mass demand for prescription as well as over-the-counter drugs and vaccinations.
U.S. Pharmacy Business Drabs: Walgreens Boots is currently facing significant challenges within the company’s U.S. Retail Pharmacy segment, stemming from an unfavorable consumer environment and adverse pharmacy industry trends. The company, in this regard, noted that customers have become increasingly selective and price-sensitive in their purchases. Despite several planned measures being taken, the company does not expect an immediate improvement within the U.S. retail business as the operating environment might continue to remain challenging.
Although WBA is currently trading above its 50-day moving average, driven by the immediate boost following the earnings release, the stock is still trading much lower than its 200-day moving average, indicating the possibility of a further bearish shift in the stock's price.
WBA Below 200-Day SMA
Image Source: Zacks Investment Research
Wait for a Better Entry Point
Walgreens Boots’ recent footprint optimization program seems to act effectively to improve the company’s financial health. Yet, looking at the company’s near-term outlook, the ongoing business hiccups and industry-wide issues might not get resolved in the rest of the calendar year 2024. Accordingly, despite the stock trading near its 52-week low of $8.22 at present, this might not be the ideal time to invest in WBA. Those who already own this Zacks Rank #5 (Strong Sell) stock may even consider getting rid of it for the time being and wait till the company's financial stability starts to offer potential pathways to recovery.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.