There is a key difference to being a strategic investors and a special situation investor. Sometimes the two coincide, but strategic is more short-term while special situations can take months or even years to play out. That’s assuming the special situation’s upside does even play out. Now there is a strategic dilemma for investors in Walgreens Boots Alliance, Inc. (NASDAQ: WBA) after its earnings report, and its plans inside that report, sent its shares up nearly 20% in two trading days.
There are of course many items to explain this inside the report, but Walgreens Boots Alliance reported on Tuesday that its adjusted earnings of $0.39 EPS was down 40.8% percent on a constant currency basis while its sales rose 6.0% to $37.5 billion. After including all the items in the notes, Walgreens Boots posted negative results of -$3.48 EPS for its fourth quarter. After everything normalizes, will there really be value for investors to gobble up?
Oggonomics wants to see if this is more of a situation for a shorter-term strategic view or whether it needs to be for longer-term special situation investors. Please note — In no way should any of the data and opinions in this review be considered investment advice nor should it be considered a recommendation to buy or sell any securities mentioned. All investment decisions are the responsibility of each investor and those decisions need to be made along with a financial advisor.
GUIDANCE & “OPTIMIZATION”
There are two critical items that have to be considered looking into 2025. Walgreens Boots Alliance did offer 2025 EPS guidance and it is telegraphing a significant store-count reduction along with a capital spending cut.
WBA is targeting adjusted earnings at $1.40 to $1.80 EPS in Fiscal Year 2025. That is based on $1147 billion to $151 billion in revenues and $1.6 billion to $2.0 billion in adjusted operating income. It sees growth in U.S. Healthcare and International being more than offset by a decline in U.S. Retail Pharmacy, as well as a higher adjusted effective tax rate, and lower contributions from sale-leaseback and Cencora earnings.
Announcing store closures may not be a total surprise, but the targeted count may be surprising to many investors. When addressing its 6% sales growth, WBA did say that the numbers reflected sales growth across all segments. Its U.S. comparable sales in the U.S. retail pharmacy segment were also up 8.3% from a year ago. Now the company’s “footprint optimization program” is targeting approximately 1,200 closures over the next three-year period, which includes approximately 500 closures in fiscal 2025.
WHAT 2025 REALLY LOOKS LIKE
There are obviously lots of considerations on where stores are to be closed. One issue which stood out is that the closures targeted were said to be “which will be immediately accretive to adjusted EPS and free cash flow.”
Tim Wentworth, CEO of Walgreens Boots Alliance, did outline problems and cost cuts for 2024. But for 2025 and beyond, he said:
In fiscal 2025, we are focusing on stabilizing the retail pharmacy by optimizing our footprint, controlling operating costs, improving cash flow, and continuing to address reimbursement models to support dispensing margins and preserve patient access for the future. Fiscal 2025 will be an important rebasing year as we advance our strategy to drive value creation. This turnaround will take time, but we are confident it will yield significant financial and consumer benefits over the long term.
Walgreens Boots will take charges of up to $2.4 billion for store closings. That includes approximately $2 billion to exit lease obligations and other real estate costs. Then it includes approximately $300 million in asset impairment charges and $100 million for employee severance and other exit costs.
Walgreens counts approximately 12,500 locations in the U.S., Europe and Latin America. It also counts approximately 312,000 employees with a presence in 8 countries through its portfolio of consumer brands.
WALL STREET’S REACTION
There have been surprisingly (or unsurprisingly) very few analysts jumping on board with “all in” and “perfection” commentary. Keep in mind that Walgreens Boots shares closed at $9.00 ahead of earnings. This was a $25 stock at the start of 2024, and that was versus $60 back in 2019. This means that any analyst who has been bullish about WBA, including when it became a brief member of the Dow, feels like WBA is a hangman’s noose.
BofA’s Allen Lutz is still telling brokerage clients to sell WBA. His rating remains Underperform along with a $7.50 price objective. His call addressed 2025 guidance highlights with ongoing operational challenges and persistent pharmacy margin pressures. And while the strategic and operational initiatives can mitigate some of the earnings degradation, he sees structural headwinds persisting with valuations reflecting uncertainty in the long-term growth trajectory. The catch-line of the report for WBA even says, “Store closures lower the temperature, but pharmacy is still a melting ice cube.”
Morningstar has a Buy rating and a $20 fair value estimate, down from a prior $23 estimate. The firm said that the 1,200 store closures is moderately higher than its forecast at the end of last quarter but is about half of 2,000 that were deemed to be under review. This report even calls WBA as “No-moat Walgreens,” which is not very complementary.
Evercore ISI only maintained its In-Line rating but still raised its price target to $10.00 from $7.50.
Morgan Stanley maintained its Underweight rating with a $7.00 price target. The call addresses potential short-term stock movement, but it is cautious until better consumer conditions and more strategic plan details are released.
Barclays has an Underweight rating and a $8.00 price target, also the equivalent of “Sell” ratings.
THE LONG-TERM MEMORY CHALLENGE
Oggonomics recently asked whether a strategic move from CVS Health Corporation (NYSE: CVS) leaves any room for Walgreens. Apparently it does, but that comes with a significant amount of caution. CVS has a market cap of $82 billion, versus less than $9.5 billion for Walgreens.
Perhaps the most difficult part of this scenario is that Rite Aid has to come to mind if you have been around the investing community for 25 years or more. Rite Aid was a standalone pharmacy that mostly rented its store space. It was even more competitively challenged by CVS, Walgreens and other pharmacy stores. Apparently, the wave of newer competition was the final straw. Rite Aid eventually filed for bankruptcy and is currently in private hands. In 2000 it counted itself as the second largest retail drugstore chain in the United States with 3,776 stores in most U.S. states. Now, even after emerging from Chapter 11, Rite Aid still has 1,300+ stores in 15 states.
THE STOCK CHART
Walgreens Boots Alliance is showing a chart in trouble. That said, if the stock can get back to $12 then any shareholder who bought since the end of June will be able to sell for a significant short-term gain. And then there is a “technical no-man’s land” between $12.50 and $14.50. And to prove how ugly it has been in 2024, WBA’s 200-day moving average is all the way up at $15.46. Thanks to StockCharts.com for the chart below.
