Walgreens Boots Alliance, Inc. (WBA), an integrated healthcare, pharmacy, and retail leader, beat revenue analyst expectations for its fiscal 2023 third quarter. The company reported a revenue of $35.42 billion, above the consensus revenue estimate of $34.12 billion and up 8.6% year-over-year due to sales growth in its retail pharmacy and healthcare segments.

WBA’s U.S. retail pharmacy segment generated around $28 billion in sales for the quarter, an increase of 4.4% year-over-year. Also, its pharmacy sales grew 6.3% compared to the same quarter of 2022. However, the company posted an adjusted earnings per share of $1 versus $1.07 expected by analysts.

The retail pharmacy chain’s earnings fell short of Wall Street expectations for the first time since July 2020 due to weakened consumer spending and a drop in demand for COVID-19 vaccines and testing.

WBA is scheduled to release its fourth quarter and fiscal 2023 results at 7 a.m. ET on Thursday, October 12, 2023. Due to challenging consumer and macroeconomic conditions, the drugstore chain slashed its earnings guidance to a range of $4 to $4.05 per share for the full year, down from its prior forecast of $4.45 to $4.65 per share.

The fourth quarter will likely be negatively impacted by a higher effective tax rate, shifting U.S. consumer spending, and a weaker respiratory season for U.S. Retail Pharmacy and U.S. Healthcare. Despite the challenges, the company expects adjusted operating income growth to accelerate in the fourth quarter from 0.6% in the third quarter.

In September, Rosalind Brewer abruptly stepped down as a chief executive of WBA after nearly two and a half years when the pharmacy group’s valuation halved, and it abandoned a planned sale of its UK-based retail chain.

Ginger Graham, a board member since 2010 and former chief of Amylin Pharmaceuticals, took the chief executive role while the company is looking for “a successor with deep healthcare experience.”

Despite its bleak near-term outlook, Walgreens has the right turnaround strategy to drive sustainable core growth and deliver long-term shareholder value. WBA announced an increase to its Transformational Cost Management Program target from $3.50 billion to $4.10 billion in total savings.

Also, the company is taking immediate actions to optimize profitability for its U.S. Healthcare segment, including an increased and accelerated synergy target for VillageMD/Summit Health of $200 million by calendar 2026.

Shares of WBA have declined 39% over the past six months and 41.4% year-to-date to close the last trading session at $21.81. The stock is currently trading 48.4% below its 52-week high of $42.29, which it hit on December 13, 2022.

Here’s what could influence WBA’s performance in the upcoming months:

Positive Latest Development

On September 12, WBA and Pearl Health announced a partnership to advance value-based care in collaboration with community-based primary care physicians. The company’s partnership with Pearl Health allows it to reach more communities faster, enabling comprehensive, affordable care that enhances long-term health outcomes and fosters healthier communities.

Mixed Financials  

WBA’s sales increased 8.6% year-over-year to $35.42 billion for the third quarter ended May 31, 2023. Its gross profit came in at $6.59 billion, up marginally year-over-year. However, the company’s operating loss widened 33.3% from the year-ago value to $172 million. Its adjusted EBITDA loss worsened 6.6% year-over-year to $113 million.

Furthermore, adjusted net earnings attributable to WBA came in at $860 million, up 3.1% year-over-year, and its adjusted net earnings per common share increased 4.2% from the prior year’s quarter to $1. But WBA’s cash and cash equivalents stood at $871 million as of May 31, 2023, compared to $1.36 billion as of August 31, 2022.

Mixed Historical Growth

WBA’s revenue and total assets grew at respective CAGRs of 2.7% and 4.5% over the past three years. However, the company’s EBITDA decreased at a CAGR of 17.1% over the same timeframe. Also, its normalized net income and levered free cash flow declined at CAGRs of 16.3% and 26.4%, respectively, over the same period.

Disappointing Analyst Estimates

Analysts expect WBA’s revenue to increase 7.3% year-over-year to $34.82 billion for the fourth quarter that ended August 2023. However, the consensus earnings per share estimate of $0.69 for the to-be-reported quarter indicates a 14% year-over-year decline. The company has surpassed the consensus revenue estimate in each of the trailing four quarters.

In addition, Street expects WBA’s revenue and EPS for the fiscal year 2023 to increase 4.4% and decrease 20.7% from the previous year to $138.50 billion and $4, respectively. The company’s revenue and EPS for fiscal year 2024 are expected to grow 4.2% and decline 6.6% year-over-year to $144.31 billion and $3.73, respectively.

Mixed Profitability

WBA’s trailing-12-month asset turnover ratio of 1.42x is 56.4% higher than the industry average of 0.91x. However, the stock’s trailing-12-month gross profit and EBITDA margins of 19.84% and 2.10% are lower than the respective industry averages of 32.90% and 11.43%.

Moreover, the stock’s trailing-12-month net income margin of negative 2.24% compares unfavorably to the industry average of 4.16%. Its trailing-12-month ROCE and ROTA of negative 14.01% and negative 3.36% are lower than the industry averages of 11.68% and 4.52%, respectively.

Mixed Valuation

In terms of forward non-GAAP P/E, WBA is currently trading at 5.45x, 67.6% lower than the industry average of 16.84x. The stock’s forward EV/Sales of 0.46x is 72.5% lower than the industry average of 1.68x. Likewise, its forward Price/Sales multiple of 0.14 is 86.8% lower than the industry average of 1.03.

However, the stock’s forward EV/EBITDA and EV/EBIT of 11.44x and 16.17x are higher than the industry averages of 10.93x and 14.86x, respectively.

POWR Ratings Reflect Uncertainty

WBA’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, equating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. The stock has a C grade for Value and Quality, consistent with its mixed valuation and profitability, respectively.

Within the Medical - Drug Stores industry, WBA is ranked #3 out of 5 stocks.

Beyond what I have stated above, we have also given WBA grades for Sentiment, Stability, Growth, and Momentum. Get all WBA’s POWR Ratings here.

Bottom Line  

Despite a challenging operating environment, WBA achieved solid sales growth in the last reported quarter as consumers continued to appreciate the value, convenience, and range of services provided by Walgreens and Boots. However, lower demand for COVID-related services, a more cautious consumer, and a weaker respiratory season led to margin pressures during the quarter.

Furthermore, the company’s revised full-year 2023 guidance reflects consumer spending uncertainty and other macroeconomic conditions.

Given its mixed financials, mixed valuation and profitability, and bleak near-term prospects, it could be wise to hold WBA and wait for a better entry point in the stock.

Stocks to Consider Instead of Walgreens Boots Alliance, Inc. (WBA)

Given its uncertain short-term prospects, the odds of WBA outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) or B-rated (Buy) medical stocks instead:

UnitedHealth Group Inc. (UNH)

CVS Health Corporation (CVS)

Cigna Corporation (CI)

To explore more A and B-rated medical stocks, click here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

WBA shares fell $0.11 (-0.50%) in premarket trading Monday. Year-to-date, WBA has declined -38.87%, versus a 13.57% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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