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Stay up-to-date with all quarterly releases: See Zacks Earnings Calendar.
The Zacks Consensus Estimate for the company’s fiscal fourth-quarter earnings has remained constant at 36 cents per share in the past 30 days. The estimate indicates a 46.3% plunge from the year-ago comparable figure. However, the company’s revenues are expected to improve by 1.1% to $35.8 billion.
Image Source: Zacks Investment Research
Walgreens missed earnings estimates twice in the trailing four quarters and outperformed on the other two occasions, holding an average surprise of 10.9%.
Image Source: Zacks Investment Research
WBA’s Earnings Whispers: A Miss Ahead?
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 +10.92%. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
The current macroeconomic issues worldwide, including labor shortages and supply-chain disruptions, are likely to have posed headwinds for Walgreens in the fourth quarter of fiscal 2024. The company is 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.
For the past several months, the company’s U.S. retail pharmacy business has struggled with a difficult consumer environment due to ongoing inflation and reduced household savings. With customers increasingly turning to alternative channels and cutting back on non-essential purchases, the company’s retail sales are expected to have been affected. According to the Zacks Consensus Estimate, the retail arm of the segment is expected to dip by 0.6% in the to-be-reported quarter.
Challenges in the pharmacy industry, such as branded mix impacts, and regulatory and reimbursement pressures, may have negatively impacted its pricing dynamics. A slower recovery in the prescription market may have limited Walgreens’ ability to serve patients profitably. All these factors are likely to have affected its bottom-line performance as well.
On a brighter note, the company may have seen an uptick in pharmacy sales due to higher inflation in branded drug and script growth. To address the retail pressures, Walgreens has been investing in targeted promotion and price decisions to attract more customers to their stores, which may have benefited. The Zacks Consensus Estimate predicts a modest 0.7% year-over-year improvement in U.S. retail pharmacy revenues for the fourth quarter of fiscal 2024.
Walgreens’ U.S. Healthcare segment is likely to have performed well, driven by Shields Health Solutions, which remarkably rose 24% in the fiscal third quarter on the strength of existing partnerships. The division may have witnessed improved profitability from its disciplined cost management strategies. Going by the Zacks Consensus Estimate, the U.S. Healthcare segment’s revenues are projected to increase 6.5% year over year in the to-be-reported quarter.
Within the International division, Boots U.K. is likely to have delivered solid retail comparable growth and captured more shares, driven by strong performances in both physical and digital channels. According to the Zacks Consensus Estimate, Walgreens’ International business revenues are likely to have improved by 2% in the fiscal fourth quarter.
We expect the company to have achieved $1 billion in cost savings in fiscal 2024 through its multi-faceted Transformational Cost Management Program. Walgreens’ cash flow generation is likely to have improved, having met its target of a $600 million reduction in capital expenditures and $500 million in working capital benefits.
WBA Stock Price Performance
Walgreens shares have experienced a downward trend in the past year, plunging 60.9% compared with the industry’s 19.4% fall and the S&P 500’s growth of 32.2%. The stock has also grossly underperformed industry peers CVS Health (CVS - Free Report) and Herbalife Ltd. (HLF - Free Report) , whose shares declined 9.4% and 49.1%, respectively, in the same time frame.
1-Year Price Comparison
Image Source: Zacks Investment Research
WBA Stock Appears Undervalued
Going by the forward 12-month price-to-earnings (P/E), WBA shares are trading at 4.92X, lower than the industry average of 8.30X and its median of 7.86X.
P/E Ratio Forward Twelve Months (F12M)
Image Source: Zacks Investment Research
Walgreens’ Investment Thesis
Considering all the operational hurdles, Walgreens CEO Tim Wentworth pointed out the unsustainability of the existing pharmacy model during the June 2024 earnings call. As part of a strategic review of its businesses, the company is finalizing a multi-year U.S. footprint optimization program to close many of its underperforming U.S. Retail Pharmacy stores (nearly 25% of the locations) over the next three years. Walgreens is also reevaluating its product offerings to better align with customers’ needs by working with select national suppliers and through its brands.
To simplify its U.S. Healthcare portfolio, Walgreens revealed that it is evaluating several options for its majority stake in VillageMD, including a potential sale of all or part of the businesses, restructuring or other better alternatives. If the plan proceeds, it would represent a stark departure from the company’s initial strategy to grow into value-based primary care — one of the fast-growing segments in healthcare.
Added to this, Walgreens’ margins are increasingly pressured by the declining prescription drug reimbursement rates from the PBMs (pharmacy benefit managers), a slowdown in newer generics introduction and inflation in generic drug costs. In terms of liquidity, the company appears to be struggling, while its rising debt levels continue to worry.
Meanwhile, the $7.53 billion company is planning to build out an asset-light health services strategy to deliver care for communities and create value for its partners. The company has upgraded its specialty pharmacy offerings, including gene and cell therapy services, as part of a new $24 billion initiative to expand patient access to specialized treatments for complex, chronic conditions.
WBA is focusing more on areas where it can lead, such as health, beauty and women's health, and also enhancing its digital and omnichannel offerings to better serve customers. The company's efforts to boost productivity are evident from its cost reduction and other business optimization initiatives.
Our Final Take on WBA
Given the ongoing headwinds in the retail and pharmacy landscape, we do not expect Walgreens to deliver a strong performance in the final quarter of fiscal 2024. The company is presently undergoing a full restructuring, and the full impact of the actions based on the strategic review may take time to impact its financial performance favorably. While its productivity initiatives and strategic long-term moves are promising, Walgreens needs to tackle the immediate operational challenges effectively. Even though the stock appears cheaper, market watchers considering the stock should steer away for now. Those already holding Walgreens shares may find it prudent to sell.
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Assessing WBA Before Q4 Earnings: How Should You Play the Stock?
Retail pharmacy giant, Walgreens Boots Alliance (WBA - Free Report) is set to release fourth-quarter fiscal 2024 results (ended Aug. 31) before the opening bell on Oct. 15.
Stay up-to-date with all quarterly releases: See Zacks Earnings Calendar.
The Zacks Consensus Estimate for the company’s fiscal fourth-quarter earnings has remained constant at 36 cents per share in the past 30 days. The estimate indicates a 46.3% plunge from the year-ago comparable figure. However, the company’s revenues are expected to improve by 1.1% to $35.8 billion.
Image Source: Zacks Investment Research
Walgreens missed earnings estimates twice in the trailing four quarters and outperformed on the other two occasions, holding an average surprise of 10.9%.
Image Source: Zacks Investment Research
WBA’s Earnings Whispers: A Miss Ahead?
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 +10.92%. 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’ Q4 Performance
The current macroeconomic issues worldwide, including labor shortages and supply-chain disruptions, are likely to have posed headwinds for Walgreens in the fourth quarter of fiscal 2024. The company is 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.
For the past several months, the company’s U.S. retail pharmacy business has struggled with a difficult consumer environment due to ongoing inflation and reduced household savings. With customers increasingly turning to alternative channels and cutting back on non-essential purchases, the company’s retail sales are expected to have been affected. According to the Zacks Consensus Estimate, the retail arm of the segment is expected to dip by 0.6% in the to-be-reported quarter.
Challenges in the pharmacy industry, such as branded mix impacts, and regulatory and reimbursement pressures, may have negatively impacted its pricing dynamics. A slower recovery in the prescription market may have limited Walgreens’ ability to serve patients profitably. All these factors are likely to have affected its bottom-line performance as well.
On a brighter note, the company may have seen an uptick in pharmacy sales due to higher inflation in branded drug and script growth. To address the retail pressures, Walgreens has been investing in targeted promotion and price decisions to attract more customers to their stores, which may have benefited. The Zacks Consensus Estimate predicts a modest 0.7% year-over-year improvement in U.S. retail pharmacy revenues for the fourth quarter of fiscal 2024.
Walgreens’ U.S. Healthcare segment is likely to have performed well, driven by Shields Health Solutions, which remarkably rose 24% in the fiscal third quarter on the strength of existing partnerships. The division may have witnessed improved profitability from its disciplined cost management strategies. Going by the Zacks Consensus Estimate, the U.S. Healthcare segment’s revenues are projected to increase 6.5% year over year in the to-be-reported quarter.
Within the International division, Boots U.K. is likely to have delivered solid retail comparable growth and captured more shares, driven by strong performances in both physical and digital channels. According to the Zacks Consensus Estimate, Walgreens’ International business revenues are likely to have improved by 2% in the fiscal fourth quarter.
We expect the company to have achieved $1 billion in cost savings in fiscal 2024 through its multi-faceted Transformational Cost Management Program. Walgreens’ cash flow generation is likely to have improved, having met its target of a $600 million reduction in capital expenditures and $500 million in working capital benefits.
WBA Stock Price Performance
Walgreens shares have experienced a downward trend in the past year, plunging 60.9% compared with the industry’s 19.4% fall and the S&P 500’s growth of 32.2%. The stock has also grossly underperformed industry peers CVS Health (CVS - Free Report) and Herbalife Ltd. (HLF - Free Report) , whose shares declined 9.4% and 49.1%, respectively, in the same time frame.
1-Year Price Comparison
Image Source: Zacks Investment Research
WBA Stock Appears Undervalued
Going by the forward 12-month price-to-earnings (P/E), WBA shares are trading at 4.92X, lower than the industry average of 8.30X and its median of 7.86X.
P/E Ratio Forward Twelve Months (F12M)
Image Source: Zacks Investment Research
Walgreens’ Investment Thesis
Considering all the operational hurdles, Walgreens CEO Tim Wentworth pointed out the unsustainability of the existing pharmacy model during the June 2024 earnings call. As part of a strategic review of its businesses, the company is finalizing a multi-year U.S. footprint optimization program to close many of its underperforming U.S. Retail Pharmacy stores (nearly 25% of the locations) over the next three years. Walgreens is also reevaluating its product offerings to better align with customers’ needs by working with select national suppliers and through its brands.
To simplify its U.S. Healthcare portfolio, Walgreens revealed that it is evaluating several options for its majority stake in VillageMD, including a potential sale of all or part of the businesses, restructuring or other better alternatives. If the plan proceeds, it would represent a stark departure from the company’s initial strategy to grow into value-based primary care — one of the fast-growing segments in healthcare.
Added to this, Walgreens’ margins are increasingly pressured by the declining prescription drug reimbursement rates from the PBMs (pharmacy benefit managers), a slowdown in newer generics introduction and inflation in generic drug costs. In terms of liquidity, the company appears to be struggling, while its rising debt levels continue to worry.
Meanwhile, the $7.53 billion company is planning to build out an asset-light health services strategy to deliver care for communities and create value for its partners. The company has upgraded its specialty pharmacy offerings, including gene and cell therapy services, as part of a new $24 billion initiative to expand patient access to specialized treatments for complex, chronic conditions.
WBA is focusing more on areas where it can lead, such as health, beauty and women's health, and also enhancing its digital and omnichannel offerings to better serve customers. The company's efforts to boost productivity are evident from its cost reduction and other business optimization initiatives.
Our Final Take on WBA
Given the ongoing headwinds in the retail and pharmacy landscape, we do not expect Walgreens to deliver a strong performance in the final quarter of fiscal 2024. The company is presently undergoing a full restructuring, and the full impact of the actions based on the strategic review may take time to impact its financial performance favorably. While its productivity initiatives and strategic long-term moves are promising, Walgreens needs to tackle the immediate operational challenges effectively. Even though the stock appears cheaper, market watchers considering the stock should steer away for now. Those already holding Walgreens shares may find it prudent to sell.