Walgreens Boots Alliance has been navigating a challenging year, with its stock falling significantly. However, recent developments following its fourth-quarter fiscal earnings and store closure plans have helped lift the stock. Despite this uplift, the stock remains down by about 60% year to date. In this analysis, we will delve into the company's latest quarterly report, its strategy regarding store closures, and evaluate whether or not now might be a good time to purchase Walgreens stock.
During the fiscal fourth quarter, ending August 31, Walgreens faced ongoing challenges but managed to exceed expectations. The company's revenue increased by 6% year over year, reaching $37.55 billion. However, adjusted earnings per share (EPS) dropped by 40% to $0.39 due to continued margin pressures from reimbursement issues. Despite this decline, the results surpassed analyst expectations, which had forecasted an EPS of $0.36 on $35.76 billion in revenue. U.S. retail pharmacy sales rose 6.5% compared to the previous year, with same-store sales climbing 8.3%.
Pharmacy sales, in particular, grew by 11.7%, while comparable retail sales fell by 1.7%. Adjusted operating income in the U.S. was down 60.4%, affected by reimbursement pressures and a tough retail landscape. Internationally, sales rose 3.7%, with Boots UK's sales up by 2.3%. Within Boots, retail same-store sales increased by 6.2% and pharmacy same-store sales by 10%. However, international adjusted operating income fell by 10.6% to $231 million due to fewer real estate gains. The company's U.S. healthcare segment saw a 7.2% increase in revenue, reaching $2.1 billion.
Revenue growth was supported by developments in its sub-segments: VillageMD's revenue grew by 7%, and Shields' revenue surged by 24%. Despite these gains, the gross margin fell to 16.7% from 18.6%, primarily due to drug reimbursement issues. These challenges are central to Walgreen's financial health. To combat these pressures, Walgreens has enacted cost-cutting measures, achieving over $1 billion in expense reductions. It plans to close 1,200 unprofitable stores from its 8,700, including 500 slated for closure in fiscal 2025. This strategic move aims to enhance profitability by removing financial drains.
The company is also contemplating selling its majority stake in VillageMD to reduce debt. Walgreens is actively working on new reimbursement models with pharmacy benefit managers (PBMs) to bolster its financial health. With 80% of its PBM contracts now secured for the next year, there's hope for improved reimbursement terms. Furthermore, the company's prospects could benefit if the Federal Trade Commission's lawsuit against major PBMs results in increased transparency and fairer practices. Considering Walgreens' current forward price-to-earnings (P/E) ratio of 5.5, the stock appears undervalued, providing an intriguing opportunity for potential turnaround and growth.
The latest strategic moves could enhance profitability, making it a potential buy for investors willing to bet on a recovery and favorable outcomes in ongoing regulatory battles.
