It's been a tough year for Walgreens Boots Alliance (WBA -0.62%) stock, which is trading down nearly 65% year to date, as of this writing. Things don't look any better when looking even further out, as the stock has lost 88% of its value over the past decade.
There have been rumors swirling of a possible buyout. Is now the time to buy this beaten-down stock?
Can Walgreens turn around its business?
The fall of Walgreens is due to a combination of self-inflected wounds and overall industry pressure. The company admittedly made a very poor acquisition when it took a majority stake in VillageMD, a medical group that was looking to rapidly expand its footprint.
Expansion outside of Walgreens' core geographical footprint turned out to be unprofitable, and its plans to use the service as a funnel to its pharmacies didn't work out. To make matters worse, earlier this year, VillageMD defaulted on a $2.25 billion secured loan that Walgreens had provided to the company.
That said, reimbursement pressures have been a much bigger issue for the company. In the pharmacy industry, the vast majority of prescriptions are covered by insurance and not paid out of pocket by customers. Instead, health insurance companies pay the pharmacies when they fill a prescription. In turn, they hire pharmacy benefit managers (PBMs) to act as middlemen to help get discounted pricing and rebates from drug companies and set the prices insurance companies pay to pharmacies.
The PBM industry is dominated by three large companies, all of which are now owned by insurance companies. These three PBMs have exerted a huge amount of pricing pressure on the pharmacy industry over the past decade. Walgreens has said some prescriptions it fills, including for popular GLP-1 drugs, are done at a loss.
The reimbursement pressure that Walgreens experienced can be seen in its U.S. retail pharmacy gross margin, which fell from 28.2% in fiscal year 2014 to 17.9% in fiscal year 2024, ended in August. That's a huge decline that has continually eaten into the profitability of the company.
Image source: Getty Images.
To help turn around Walgreens, new CEO Tim Wentworth has been cutting costs. The company said last quarter that it surpassed its goal of reducing expenses by $1 billion and announced a plan to shutter nearly 14% of its store locations. It will close 1,200 of its 8,700 stores that it said are unprofitable over the next three years, including 500 stores in fiscal 2025, which ends in August. Walgreens has also talked about selling its entire stake in VillageMD.
Both of these moves would be addition by subtraction. Getting rid of unprofitable stores should help boost profits in two ways. One, it gets rid of money-losing stores, but it also could direct some traffic to nearby locations, helping boost their sales. Two, the sale of VillageMD would be used to reduce debt and improve Walgreens' balance sheet.
Fixing the drug reimbursement issue would go a long way to helping improve Walgreens' situation. On that front, President-elect Donald Trump has had some harsh words toward PBMs, saying how he would knock out the middleman.
However, a provision that would have greatly helped pharmacies regarding PBM reimbursements was cut out at the last minute as part of the continuing resolution to keep the government up and running. Where PBM reform goes from here is still up in the air, but it could go a long way to determining whether Walgreens stock can rebound.
Is Walgreens a buy?
From a valuation perspective, Walgreens is cheap, trading at a forward price-to-earnings ratio (P/E) of 6 and an enterprise value-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple of 5. Enterprise value takes into consideration its net debt.
WBA PE Ratio (Forward) data by YCharts.
Make no mistake: Walgreens is facing a lot of pressure. In addition to the drug reimbursement issues, Amazon and Walmart are trying to capitalize on the company's problems. They both recently announced same-day pharmacy delivery services. With Walgreens shutting stores, these two retail behemoths seek to step in and take share through convenience. Once thought to be e-commerce resistant, this no longer appears to be the case.
That said, Walgreens does have some opportunities. Any PBM regulation would likely be good for it, while the store closure plan is a positive. Meanwhile, it has assets it could possibly sell, including CareCentrix, Shields, or even its Boots UK operation. There's also the possibility the company will be bought by private equity.
All in all, I'd view Walgreens as a speculative investment. Investors with a high risk tolerance can consider taking a small position in the stock.
