Walgreens Boots Alliance (WBA – Free Report) will release its first-quarter fiscal 2024 results (ended Nov. 30) on Jan. 10 before the market opens.
Stay up-to-date with all quarterly releases: See Zacks Earnings Calendar.
The Zacks Consensus Estimate for the company’s fiscal first-quarter earnings has moved down 5.1% to 30 cents in the past 30 days. The estimate indicates a 43.6% plunge from the year-ago comparable figure. However, revenues are expected to improve slightly by 1.1% to $37.1 billion.
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Walgreens missed earnings estimates once in the trailing four quarters and outperformed in the other three, holding an average surprise of 13.37%.
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WBA Likely to Miss Earnings?
Per our proven model, a stock with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), along with a positive Earnings ESP, has a higher chance of beating estimates. However, that is not the case here, as you can see below:
Earnings ESP: Walgreens has an Earnings ESP of -6.04%. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
Zacks Rank: The company currently carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks Rank #1 stocks here.
Factors Shaping Walgreens’ Q1 Performance
U.S. Retail Pharmacy
For the past several months, the company’s U.S. retail business has struggled with a difficult consumer environment due to ongoing inflation and discretionary purchases. Within the pharmacy industry, branded mix impacts and heightened regulatory and reimbursement complexities are putting pressure on the pricing dynamics. Sales in this segment heavily rely on prescription drug reimbursements from a limited number of pharmacy benefit management (PBM) companies, with the recent changes in NADAC (National Average Drug Acquisition Cost) pricing creating more volatility.
Added to this, worldwide supply-chain disruptions, along with an uncertain economic and geopolitical environment, are leading to inflationary pressures and rising input costs. All these factors are expected to have negatively weighed upon Walgreens’ bottom line in the first quarter of fiscal 2025.
On a promising note, U.S. Pharmacy sales are likely to have increased, with prescription scripts tracking in line with the overall prescription market year to date. The focus on value-seeking behavior and new product introductions are likely to have contributed to higher brand penetration. We also expect an improvement in the Retail adjusted gross margin due to the category mix toward health and wellness products.
The Zacks Consensus Estimate projects Walgreens’ U.S. retail pharmacy revenues to increase modestly by 0.9% year over year in the first quarter of fiscal 2025.
International
The segment is expected to have benefited from the strong performance of Germany wholesale. Boots UK is likely to have continued the momentum in the fiscal first quarter of 2025, with comparable retail sales also rising and market share gains across all categories.
According to the Zacks Consensus Estimate, Walgreens’ International business revenues are projected to improve by 1.4% year over year.
U.S. Healthcare
In the fiscal 2025 first quarter, Walgreens is expected to have delivered strong revenues driven by Shields Health Solutions, which grew 28% in the fiscal fourth quarter on the strength of its existing partnerships. VillageMD’s sales are likely to have benefited from growth in full-risk lives and fee-for-service revenues. Operationally, the segment may have delivered another quarter of positive adjusted EBITDA.
Per the Zacks Consensus Estimate, the U.S. Healthcare segment’s revenues are projected to increase 5.9% year over year in the to-be-reported quarter.
Also, Walgreens delivered its targeted annual cost savings in fiscal 2024 through its Transformational Cost Management Program. Many of these initiatives are likely to have extended into this fiscal year, with the company likely making further progress in the fiscal 2025 first quarter. Walgreens is expected to have advanced its efforts to improve operating leverage, including speeding up the footprint optimization program.
However, for quite some time now, WBA has been considering selling all of its VillageMD businesses, as per multiple sources. Last year, WBA announced that it would close 160 VillageMD clinics after incurring a $6 billion net loss in the fiscal 2024 second quarter. Any sell-off, if taken place in the fiscal first quarter, could lead to a significant impact on the top line for the to-be-reported quarter.
WBA Stock Price Performance
Walgreens shares have struggled in the past year, plummeting 62.9% compared with the industry’s 47.2% decline and the S&P 500’s 25.9% growth. In contrast, peers like CVS Health (CVS – Free Report) and Herbalife Ltd. (HLF – Free Report) have experienced 43.2% and 50.5% respective declines in their shares in the same time frame.
1-Year Price Comparison
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WBA Stock Looks Cheap
Based on the forward 12-month price-to-earnings (P/E), Walgreens shares are trading at a multiple of 6.44X, lower than the industry average of 7.23X and its median of 8.76X.
P/E Ratio Forward Twelve Months (F12M)
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Walgreens’ Investment Thesis
Per the company, 2025 will be an important rebasing year to drive longer-term value creation. Walgreens had conducted a strategic review, a critical objective of which was to respond to changing consumer behavior and buying preferences. Several retail initiatives are being executed over multiple periods in response to this dynamic. WBA announced an acceleration of its footprint optimization program to close approximately 1,200 underperforming stores over the next three years and reduce the fixed costs associated with them. It is also refining its product offering by being more selective with national brands and expanding its own branded products, particularly in health and wellness and women’s health.
Walgreens is also prioritizing a disciplined financial approach, aiming for strong cash flow and operating leverage. Its near-term approach is to improve its operating cash flows through cost and working capital management while laying the groundwork for AOI (Adjusted Operating Income) growth. For this fiscal, the company is targeting $500 million in working capital initiatives and plans to cut another $150 million in capital expenditures.
Walgreens is exploring options to monetize non-core assets, such as VillageMD, where it currently holds a majority position. Proceeds from the potential sale of all or part of the businesses, restructuring or other better alternatives would be redeployed toward reducing the net debt and improving the overall balance sheet. The company’s latest move signals a departure from its initial strategy of expanding into value-based primary care, a fast-growing healthcare market.
Walgreens is also working with PBMs to secure more stabilized, predictable reimbursement rates. The company has strong visibility into reimbursement for nearly 80% of its expected prescription volume in fiscal 2025 and is encouraged by some PBM partners who are open to adjusting reimbursement based on current market trends. WBA is expanding the reimbursed services through strategic efforts, such as provider status and other new payment arrangements.
All these efforts are expected to materialize over time, supported by additional steps. By fully deploying pharmacist capabilities, Walgreens aims to lighten the burden on the broader healthcare system and stabilize and improve the overall pharmacy economics.
How to Play WBA Stock?
Walgreens is prioritizing stabilizing its core operations and making progress on the long-term strategic and operational turnaround. However, price-sensitive consumer behavior will continue to put pressure on U.S. Retail Pharmacy businesses. Investors currently holding Walgreens stock may find it beneficial to sell. Despite the stock’s lower valuation, it is best for prospective investors to steer away for now.
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