Shares of Walgreens Boots Alliance recently experienced a substantial rally following the announcement of stronger-than-expected earnings in its fiscal fourth quarter, which ended on September 30. This significant uptick came as welcome news for investors, especially given the stock's dramatic downturn earlier this year, where it lost over half its value. Walgreens, being a leader in the healthcare sector, has proposed a series of strategic restructuring initiatives aimed at securing sustainable, long-term growth. Understanding these key elements is crucial for anyone considering investing in Walgreens Boots Alliance shares.
Walgreens has faced numerous economic and industry-specific challenges over the years. The rise of online pharmacies and e-commerce giants has intensified competition, leading to weak sales over the past decade. Additionally, rising operational costs and decreasing insurance reimbursement rates have put pressure on both margins and earnings. The company also endured numerous lawsuits related to its role, along with other national pharmacies, in the opioid crisis, resulting in financial settlements amounting to billions.
Yet, recent results suggest a potential stabilization within core operations. In Q4, Walgreens reported net sales of $37.5 billion, marking a 6% year-over-year increase, surpassing the Wall Street consensus estimate of approximately $35.8 billion. Adjusted earnings per share were $0.39, exceeding market forecasts, albeit down 41% from the previous year due to weakened margins, especially as retail sales declined by 1.7%. The U.S. pharmacy business served as a driving force with an 11.7% increase in comparable sales, supported by a favorable sales mix and higher pricing strategies.
Internationally, the standout performer was the Boots UK group, which saw an acceleration in online sales. Of significant note was Walgreens' announcement of a 'footprint optimization program,' a plan to close 1,200 stores over the next three years, targeting underperforming locations. This initiative is anticipated to strengthen the balance sheet and enhance profitability immediately. The guidance for fiscal 2025 predicts a continuation of momentum, with expected sales growth of around 1% and an EPS target ranging from $1.40 to $1.80.
From a strategic standpoint, I'm cautiously optimistic about Walgreens' future. The company is focused on enhancing its financial outlook by adopting a more streamlined operational approach. Expected improvements in profitability margins indicate a positive trajectory for investors, despite no immediate return to peak earnings levels seen in prior decades. A looming question is how management will handle dividend payouts, specifically whether the $0.25 quarterly rate, yielding 10%, is sustainable. CEO Tim Wentworth hinted that a reevaluation of the capital allocation strategy might be forthcoming.
In my opinion, Walgreens shares might provide more value for their growth potential than as a mere high-yield investment. The current valuation reflects a forward price-to-earnings ratio of just seven times the management's full-year EPS target, highlighting its value proposition. Signs of successful turnaround strategy implementations in the coming quarters could serve as a catalyst for a further rally. Despite present uncertainties and the need for rebuilding investor confidence, for those with a long-term investment perspective, incorporating Walgreens shares through a dollar-cost averaging strategy within a diversified portfolio may prove rewarding.
