Walgreens' Shares Soar as Business Transformation Commences. Is the Momentoptimal for Purchasing Stocks Now?
Walgreens' Shares Soar as Business Transformation Commences. Is the Momentoptimal for Purchasing Stocks Now?
2025 has proven to be a better year so far for Walgreens Boots Alliance (WBA), with its stock soaring after declining by over 60% in 2024. The pharmacy giant revealed better-than-expected fiscal Q1 2025 results for the period ending November 2024, setting the stage for a potential turnaround. Let's delve deeper into their latest quarterly report and assess whether it's worth investing in this stock.
Turnaround in the Works
While profits fell in the quarter, Walgreens managed to surpass analyst expectations. Revenue skyrocketed by 7.5% year-over-year to reach $39.5 billion, with adjusted earnings per share (EPS) dipping 29% to $0.51. This surpassed the analyst consensus of $0.37 in adjusted EPS and $37.4 billion in revenue.
Revenue growth dominated across all segments. U.S. retail pharmacy sales climbed 6.6% year-over-year, with same-store sales booming by 8.5%. Comparable pharmacy sales rocketed 12.7% higher, driven by a 2.3% increase in prescription volumes. However, it's worth noting that comparable retail sales slumped 4.6% due to a slow cold and flu season and continued weakness in discretionary items.
Walgreens' U.S. pharmacy business continued to suffer as a result of pharmacy reimbursement pressures, with adjusted operating income slipping by 36.4% year-over-year to $441 million and U.S. retail pharmacy gross margins sliding from 18.8% to 17%.
In an effort to cut costs, Walgreens closed 67 locations in the quarter, with plans to close an additional 450 stores by the end of 2025. They report that most of their 2025 reimbursement contracts feature clauses to mitigate risk, but they acknowledge that this strategy negatively impacted retail sales in the quarter.
International sales saw a 6.5% year-over-year increase, led by a 4.6% surge in Boots UK sales. Pharmacy same-store sales climbed by 10.9%, while retail same-store sales rose by 8.1%. International adjusted operating income rocketed by 16.1% year-over-year to $168 million.
Sales from the U.S. healthcare segment jumped 12% year-over-year to reach $2.17 billion, with earnings before interest, taxes, depreciation, and amortization (EBITDA) climbing to $70 million. This was bolstered by strong performances from Walgreens' clinic partner VillageMD, which reported revenue growth of 9%, as well as specialty pharmacy Shields and home-based patient care provider CareCentrix, which saw revenues increase by 30% and 16%, respectively.
Walgreens commenced the sale process for VillageMD, while evaluating future plans for Summit/CityMD, the urgent care provider its helped VillageMD acquire.
Walgreens wound up the quarter with $8.1 billion in debt and $1.2 billion in cash. Despite generating a negative free cash flow of $424 million due to seasonal inventory buildups, the company remains optimistic about its fiscal full-year guidance for adjusted EPS of $1.40 to $1.80.
Is it Too Late to Buy the Stock?
Walgreens is still in the early stages of its turnaround metadata analysis, but there have been signs of progress. The positive impact of store closures can be seen in its strong same-store results, while the closure of unprofitable stores should ultimately yield improved profitability.
Importantly, Walgreens generally considers that the reimbursement pressure should be lessened with the 2025 contracts in place. While this is still an issue to closely monitor, there's bipartisan support for reforming the pharmacy benefit manager (PBM) industry, which could benefit Walgreens.
From a valuation perspective, Walgreens trades at a forward price-to-earnings ratio (P/E) of 7.7 and an enterprise value to EBITDA multiple of 5. By either metric, the stock appears undervalued.
However, the company continues to face pressure from reimbursement and competitions like Walmart and Amazon, which are looking to capitalize on its store closures by offering free same-day prescription deliveries. Despite these challenges and its speculative nature, the stock's attractive valuation and turnaround plan might make it a worthwhile addition to a portfolio.
Given the ongoing turnaround efforts at Walgreens Boots Alliance, investors might consider the company's financial situation. The pharmacy giant's revenue grew significantly in the quarter, surpassing analyst expectations, indicating potential investment opportunities in finance. With a positive outlook on fiscal full-year guidance for adjusted EPS, the stock could prove to be a viable option for those seeking to invest money in companies showing signs of recovery.
As Walgreens continues its efforts to cut costs and improve profitability, analysts and investors alike are closely monitoring the impact of store closures and reimbursement contracts on the company's financial performance. If Walgreens can effectively navigate these challenges, its undervalued stock could present a promising investment opportunity in the finance sector.