Walgreens Boots Alliance stock trades near lows as turnaround efforts follow weaker earnings

Walgreens Boots Alliance stock has been trading near its recent lows after the US pharmacy and retail group (ISIN US9314271019) reported a steep earnings decline for the first half of fiscal 2024 and cut its full-year outlook, underlining the scale of its turnaround challenge according to the companys latest results and investor materials.

Fiscal 2024 earnings guidance reduced

In its fiscal 2024 outlook, as presented in the companys investor information for the current financial year, Walgreens Boots Alliance now guides for adjusted earnings per share in a corridor that is lower than in the prior year, reflecting weaker US retail performance, reimbursement pressure and inflation in labor and other operating costs. Management explained in its fiscal 2024 guidance commentary that adjusted EPS is expected to fall year on year as the group invests in healthcare services and restructures parts of its store base.

According to the companys most recent annual and quarterly reporting, Walgreens Boots Alliance generated total sales of more than $139 billion in fiscal 2023, up modestly versus the prior year, while adjusted EPS declined from the previous periods level as COVID-related vaccination revenues normalized and US consumer spending softened in selected categories. The company highlighted in that reporting that underlying pharmacy demand remained resilient, but that front-of-store retail trends and cost inflation compressed margins compared with the previous year.

Revenue above $130 billion but profit under pressure

In fiscal 2023, Walgreens Boots Alliance reported revenue of approximately $139 billion, representing a low single-digit percentage increase compared with fiscal 2022, according to the groups published annual figures. The growth was driven primarily by US Healthcare and International operations, while US Retail Pharmacy saw only limited top-line expansion as front-of-store and discretionary categories slowed relative to the prior year period.

Over the same fiscal 2023 period, the companys adjusted operating income and adjusted earnings per share fell significantly versus fiscal 2022, as documented in the annual results materials, with adjusted EPS coming in well below the level reached during the pandemic-driven period when COVID-19 vaccinations and tests had boosted earnings. The company attributed the profit decline in part to lower COVID-related demand, reimbursement headwinds in the pharmacy segment, and higher wage and operating expenses, alongside spending on its strategic healthcare initiatives.

US Retail Pharmacy and healthcare strategy

Walgreens Boots Alliance divides its business into key segments, with US Retail Pharmacy remaining the largest contributor to sales. In fiscal 2023, segment revenue in US Retail Pharmacy increased slightly versus fiscal 2022, but segment operating income declined as reimbursement pressure and higher expenses more than offset the modest top-line gains, based on the segment data disclosed in the groups reporting. This pattern continued into the early quarters of fiscal 2024, with pharmacy script volume supporting revenue while profitability stayed under strain.

The company has been expanding its US Healthcare segment through investments in primary care and other clinical services, including stakes in healthcare providers and joint ventures. According to managements commentary in the latest investor presentations, US Healthcare revenue has been growing at a double-digit rate year on year, albeit from a lower base, while the segment has been making operating losses as Walgreens Boots Alliance ramps up its presence and scales operations. The strategy is intended to diversify earnings away from traditional retail and capture value in integrated health services over the medium term.

Cost savings program and store optimization

To address margin pressure, Walgreens Boots Alliance is pursuing a cost-savings and store-optimization program designed to remove more than $3 billion of costs on a cumulative basis over several years, according to its strategic updates and restructuring disclosures. The company has been reducing its store footprint in selected markets, particularly in the United States, and renegotiating terms with suppliers to improve profitability in its retail operations.

As part of this effort, management has closed a number of underperforming locations and consolidated operations in areas with overlapping stores, while also investing in digital capabilities such as online prescription refills and same-day delivery. The company reports that cumulative annual cost savings achieved so far are in the billions of dollars, compared with the baseline preceding the current transformation program, and that additional savings are targeted through further optimization of labor scheduling, supply chain efficiencies and corporate overhead reductions.

International and Boots operations

In its International segment, which includes the Boots business in the United Kingdom and other markets, Walgreens Boots Alliance reported revenue growth in fiscal 2023 compared with fiscal 2022, supported by improving footfall and recovery in beauty and personal care categories. The companys International operations benefited from the easing of pandemic-related restrictions and a return of traffic to high-street locations and travel hubs.

However, profitability in the International segment also faced pressures from inflation and competitive dynamics, as reflected in segment operating margin trends disclosed in the annual report. While Boots and other international businesses contributed positively to group sales, management has emphasized that disciplined cost control and continued modernization of the store base remain important to sustaining earnings from these operations.

Product and service focus in pharmacy and retail

A core product and service line for Walgreens Boots Alliance is its community pharmacy offering in the United States, which provides prescription medications, vaccinations and a range of health and wellness services to millions of patients each year. The companys recent reporting highlights prescription volume growth and strong demand for chronic-care medications as key drivers in the pharmacy business, even as COVID-related vaccine and testing revenue has dropped sharply from prior-year peaks.

In front-of-store retail, Walgreens Boots Alliance sells over-the-counter medicines, beauty products, personal care items, and convenience goods. The companys results show that categories such as health and wellness and beauty have performed relatively better, while discretionary and some general merchandise areas have softened. Management is working to refine assortment, increase private-label penetration and enhance omnichannel services such as in-store pickup and home delivery to stabilize and eventually improve retail margins.

Walgreens Boots Alliance stock and market view

Walgreens Boots Alliance stock reflects the tension between the groups large revenue base and its compressed profitability as the turnaround progresses. The company is included in major US equity benchmarks such as large-cap indices that track blue-chip stocks, which means that institutional and retail investors follow the name closely as a bellwether for US pharmacy and retail health trends.

For investors, the key numbers are the multi-billion-dollar annual revenue, the year-on-year decline in adjusted earnings per share from fiscal 2022 to fiscal 2023, and the lower guidance range for adjusted EPS in fiscal 2024, all of which underline that the shares currently discount substantial execution risk. At the same time, the scale of the cost-savings program and the growth in healthcare revenue indicate that successful delivery of the strategy could improve earnings over time, even if the near-term earnings metrics remain under pressure.