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Walgreens Stock: Do You Dare to Buy the S&P 500’s Worst Performer?

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The first half of 2024 is in the books, and the numbers are in. With an eye-watering 54% loss, Walgreens Boots Alliance (NASDAQ:WBA) stock is officially the worst-performing S&P 500 (SPX) stock year on a year-to-date basis.

For contrarian investors, this raises some tough questions. Is Walgreens stock “cheap for a reason,” as the critics like to say? Or, is Walgreens undervalued and poised for a comeback in the year’s second half and beyond?

There’s no shortage of negative news to report for U.S.-based Walgreens and its British counterpart, Boots. At the same time, if enough bad news has already been priced into Walgreens stock, perhaps some healing can take place in the back half of 2024.

The (nearly) worst possible quarterly report

Murphy’s Law states that everything that can go wrong will go wrong. As it turns out, Walgreens’ third-quarter fiscal 2024 financial report was a textbook example of Murphy’s Law in action.

Okay, so I’m exaggerating. Walgreens (which, unless otherwise indicated, means the full company of Walgreens Boots Alliance) actually beat Wall Street’s consensus Q3-FY2024 revenue estimate of $35.9 billion, as the company posted $36.4 billion in revenue, up 2.6% year over year.

That’s pretty much where the positive news ends and the not-so-positive news begins. Walgreens reported quarterly earnings of 63 cents per share, down 36.6% year over year on a constant currency basis. Furthermore, this result fell short of the analysts’ consensus call for earnings of 68 cents per share.

The company had plenty of reasons/excuses for the negative trend, including “a challenging U.S. retail environment” and “recent pharmacy industry trends.” In a similar vein, Walgreens CEO Tim Wentworth pointed to “a difficult operating environment, including persistent pressures on the U.S. consumer and the impact of recent marketplace dynamics, which have eroded pharmacy margins.”

What exactly do the company and Wentworth mean by “recent pharmacy industry trends” and “recent marketplace dynamics”? Most likely, they’re referring to declining reimbursement rates for sales of prescription drugs.

“If reimbursement rates start to come down and drug stores can’t offset it with other growth, then it has a negative impact on their profitability,” Evercore IRI analyst Elizabeth Anderson explained in a CNN report.

To make matters worse, “front-end” drugstore items like snacks and household products aren’t profitable enough to make up for the decline in prescription drug income. To a certain extent, that’s because shoppers can easily purchase these items at big-box stores like Walmart (NYSE:WMT) or through Amazon (NASDAQ:AMZN).

“The front end is suffering like other retailers,” Anderson observed.

Then, there was Walgreens’ not-very-healthy fiscal 2024 adjusted earnings guidance. Onlookers were shocked and WBA stock got rocked as the company reduced its full-year EPS guidance range from $3.20 to $3.35 per share previously, to just $2.80 to $2.95 currently. For reference, analysts called for fiscal 2024 earnings of $3.21 per share.

Boots x Walgreens stores up in the air

I’m sorry to say it, but there’s more unfortunate news to report. Wentworth disclosed to The Wall Street Journal that, as part of Walgreens’ turnaround plan, the company “is reviewing about a quarter of its” approximately 8,600 U.S. stores “that aren’t profitable and could shutter a ‘meaningful percent’ of those over the next few years.”

Bear in mind, investors hate uncertainty. Apparently, Wentworth didn’t specify the exact number of stores that will be shuttered. So, Walgreens’ shareholders will just have to take a wait-and-see approach, assuming they actually stay in the trade.

Plenty of people haven’t stayed in the trade. Starting off the year at around $26 per share, WBA stock recently collapsed to around $12 per share.

Oh, and there’s one more piece of discouraging news to report. The parent company, Walgreens Boots Alliance, had plans to either list Boots separately on the stock market or just sell it. Those plans didn’t pan out, evidently, and now Sebastian James is quitting his job as Boots’ CEO.

I can’t confirm that there’s a cause-and-effect connection between the failure to list or sell Boots and the stepping down of Boots’ chief executive. However, whatever the case may be, it’s another uncomfortable development for WBA shareholders.

Walgreens stock: To buy, or not to buy?

Even at its depressed price, Walgreens stock really isn’t a good value unless the company and its CEO can affect a meaningful turnaround. Wentworth has plans for Walgreens, but at this point, it’s difficult to assess their success prospects.

Along with attempting to reduce store-item theft and closing underperforming locations, Wentworth indicated to The Wall Street Journal that Walgreens “is also focusing on trimming the number of brands it offers and amping up a focus on women’s health, as well as bolstering its loyalty program.” Are these actions “too little, too late” for the flailing drugstore giant?

Possibly, so I don’t recommend taking a large share position in Walgreens stock right now. If you’re in the mood to gamble on Walgreens turning a corner under Wentworth’s leadership, though, then feel free to pick up a few shares and hope for the best.

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David Moadel
Financial Writer

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