5 Things You Need to Know When Shopping Walgreens Today

With the share price trading at multi-year lows, which has resulted in a dividend yield of almost 12%, Walgreens Boots Alliance (NASDAQ:WBA) has probably popped up on some value investors’ radars. Therefore, some of them might consider investing in the stock at this level.

Before investors make a decision on Walgreens, they should look at five things about this company that could influence their choice.

1. The stock is down 85% over the last decade

The stock has lost about two-thirds of its value so far in 2024, but Walgreens’ problems extend well beyond this year. The stock has lost 85% of its value over the last decade and is currently trading at the same level as in 1996.

Walgreens shares reached an all-time high of $96.68 in August 2015, but things have been going downhill since then. The company reached its peak after it bought the remaining 55% stake in the British pharmacy Alliance Boots shortly before the end of 2014.

2. Refund pressure was the company’s biggest problem

The biggest problem facing Walgreens is the ongoing pressure on prescription drug reimbursement, which the company has denounced since at least early 2016. Drug reimbursement prices have been depressed by Pharmacy Benefit Management Companies (PBMs), which have historically been charged with negotiating lower costs for their health insurance customers.

However, the industry is now controlled by three PBMs, all of which are now owned by companies that also own health insurance companies. Together, they control nearly 80% of the market and have relentlessly reduced pharmacy reimbursement rates to the point where, in some cases, pharmacies are losing money by filling certain scripts. Walgreens, for its part, has said it loses more with every new scenario it fills for popular GLP-1 drugs like Ozempic.

Reimbursement pressure can be seen in Walgreens’ gross margins over time. Over the past decade, gross margins increased from 28.2% in fiscal 2014 to 19.5% in the most recent fiscal year ended August 2023. The company will report its fiscal 2024 results next month.

This has hurt not only Walgreens but also smaller independent pharmacies. CVS Health has done better than most, but that’s because it not only owns a pharmacy, it also owns the largest PBM with Express Scripts as well as health insurer Aetna.

At this point, the reimbursement model is broken and is destroying the pharmacy industry. For his part, current Walgreens CEO Tim Wentworth hopes to shift reimbursements to a cost-plus model in which pharmacies are paid for their contribution to reducing inflationary pressures on drug prices and the services they provide. Previously CEO of Express Scripts, Wentworth knows the PBM business and its relationship with pharmacies as well as anyone.

It doesn’t look like it would be beneficial for PBMs to simply drive pharmacies completely bankrupt, but change takes time. Meanwhile, government regulators have largely kept quiet and appear more concerned about addressing antitrust disputes with big tech companies.

Image source: Getty Images

3. Walgreens invested poorly in VillageMD

In order to expand beyond struggling pharmacies, Walgreens’ former management also made a very bad investment when it acquired a majority stake in VillageMD, an owner of primary care medical clinics, which in turn acquired other competitors to expand . The plan was for Walgreens to build a network through which it could control continuity of care from the doctor to the pharmacy and everywhere in between.

However, VillageMD’s expansion beyond its original markets proved unprofitable, and the company began closing clinics as losses began to pile up. To make matters worse, Walgreens announced this summer that VillageMD had defaulted on a $2.25 billion secured loan it had made to the company. Meanwhile, Walgreens management said the company would consider selling some or all of its stake in VillageMD.

4. The company plans to close unprofitable locations

As part of Walgreens’ turnaround strategy, the company plans to close a significant number of its stores over the next few years. The company said that nearly 25% of its locations are unprofitable and that it will seek to close stores that are too close together, are unprofitable and/or have too many theft problems.

Closing unprofitable stores should result in an increase by subtraction and also result in an increase in same-store sales reporting as some sales are shifted to nearby stores. With lower fixed costs through fewer stores, this should lead to improved profitability over time.

Meanwhile, the entire pharmacy industry is shrinking its store base, with CVS closing stores and Rite aid After filing for Chapter 11 bankruptcy protection last year, the company is expected to close up to 500 locations. More sales in fewer stores should ultimately help the pharmacy industry and Walgreens.

5. The stock looks incredibly cheap

Walgreens’ troubles have pushed the stock into deep discount territory. It trades at a forward P/E ratio of less than 4.5 times earnings, based on analyst estimates for this fiscal year and a similar enterprise value-to-EBITDA (earnings before interest, taxes, depreciation and amortization) multiple. The company value takes into account its net debt.

WBA PE Ratio (Forward) data from YCharts

Given its valuation, I think investors stand to gain if the company manages to shed the negative parts of its business, such as VillageMD and unprofitable stores. In the meantime, if anyone can help change the reimbursement model, it should be Wentworth, who has his PBM experience.

This isn’t an easy fix, and the company could well cut its dividend again to save money, but it still needs to pull levers to improve the share price and put the company on better financial footing, including selling its non-pharmacy businesses or even selling Alliance Boots in the UK. Therefore, I would view the stock as a speculative buy for investors who are comfortable with some short-term volatility.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.