Walgreens Plummets: Avoid At All Costs (NASDAQ:WBA)

damircudic/E+ via Getty Images Shares of Walgreens Boots Alliance, Inc. (NASDAQ:WBA) are getting absolutely crushed here today. We can see the temptation here to come in and scoop what appear to be extremely cheap shares, even with all the operational problems at the company. Despite rampant theft, heavy competitions, changing dynamics of the pharmacy space, and general pressure on the consumers, the company still makes money. However, the company is in trouble. In this column, we highlight the most recent earnings, and discuss some of these issues. Data by YCharts This is one of the ugliest three-year charts you will see out there. Just devastating. Trading on the short side has been extremely profitable. The fact is that despite new leadership, many of the past decisions made by prior management continue to weigh deeply on the company. We can only see a dead cat bounce potential here near-term. Otherwise, avoid at all costs. Despite being profitable, and actually delivering revenues that were much better than expected, it is going to take years to turn the company around. Some suggest, and we concur, that this is on a very similar path to Rite Aid Corporation (OTC:RADCQ) and its horror story years ago. Now, it is not all bad news, but there is not much in the way of good news here. As mentioned, we did have a nice print for revenues that exceeded expectations. Total fiscal third quarter sales increased 2.6% from the year-ago quarter to $36.4 billion, or an increase of 2.5% on a constant currency basis. The good news here is that there was growth across all segments. The U.S. Retail Pharmacy segment saw sales of $28.5 billion, an increase of 2.3% from the year-ago quarter driven entirely by comparable pharmacy sales, partly offset by a retail decline. Comparable sales increased 3.5% from the year-ago quarter. Further, Pharmacy segment sales increased 4.4% and comparable pharmacy sales increased 5.7% compared to the year-ago quarter. More prescriptions are being filled, despite heavy and intense competition. Comparable prescriptions filled increased 1.6% from the year-ago quarter. Where pain persists is in the storefront’s retail sales, which decreased 4.0%. This stems from comparable sales falling back 2.3%. Now here is the thing, management attributed this to “a challenging retail environment and continued channel shift. Retail margin was negatively affected by increased promotional activity and higher shrink levels.” That last part is key. The theft is crushing businesses. Tough choices need to be made. Store closures in the highest crime areas is simply something that needs to be considered, and is on the table for sure. We also note that the International segment had third quarter sales of $5.7 billion, an increase of 2.8% from the year-ago quarter, led by Boots UK and decent pharmacy results. The U.S. Healthcare segment had the best growth, with sales of $2.1 billion, an increase of 7.6%. The highlight here was the Shields offering, which grew 24% from last year. Are cost-cutting efforts bearing some fruit here? Well, operating income was $111 million, compared to an operating loss of $477 million in the year-ago quarter. However, this is a bit misleading as last year there was a $431 million non-cash impairment of pharmacy license intangible assets in Boots UK. Adjusted operating income was $613 million, and this was a massive decrease of 36.3% on a constant currency basis. The operating income decline stemmed from softer U.S. retail and pharmacy performance, but there was improved profitability in the U.S. Healthcare segment of setting this. Now, we mentioned that the company is profitable. However, it has been a value trap for the ages because earnings continue to trend lower over time. Folks, this quarter saw a huge decline in earnings from a year ago. Net earnings were $344 million compared to net earnings of $118 million in the year-ago quarter, an increase of $225 million reflecting higher operating income. But again, this is misleading. On an adjusted basis, net earnings were $545 million, down 36.5%t on a constant currency basis, following adjusted operating income lower. This is painful. And of course, adjusted EPS followed suit, coming in at $0.63, down $0.36 from a year ago. Now, even considering a year ago’s impairment charge, there was some glimmer of sunshine in the cash flow print. Net cash provided by operating activities was $605 million and free cash flow was $334 million, a $778 million increase compared with the year-ago quarter. This stemmed from streamlining working capital and a big cut to capital expenditures. So where do we go from here? Well, with a painful overall earnings print, guidance was slashed, again. Management lowered its fiscal 2024 adjusted EPS expectations to $2.80 to $2.95. On a valuation basis, with shares at about $12 here, the temptation to come in and bet on a turnaround is palpable. We are talking just over a 4X multiple here. But we see no reason why this suddenly is not a value trap anymore. At best, it is speculative. Tough choices need to be made. Earlier we suggested that closing stores in the highest crime neighborhoods where theft is rampant and goes unpunished has to be on the table. Closing other underperforming stores not experiencing as much shrink needs to be on the table. Further, to shore up the balance sheet, we would think a dividend cut or elimination has to be on the table. As of now, management is finalizing a multiyear footprint optimization program to close underperforming U.S. stores. Frankly, we would not be surprised to see 20% of stores close their doors. Where we do think there is opportunity is in the Healthcare segment. There is some nice growth there and improving profitability. If management can align this segment better with the U.S. pharmacy side of things, it could bear fruit. But it does not remove the pressure from questionable reimbursement rates, intense competition from major chains and direct delivery of meds. The severe theft is not just hitting Walgreens either, but the solution in our opinion is to simply get out of those areas. While that certainly hurts the local consumers who rely on Walgreens as their pharmacy, Walgreens is not running a charity here. Thus, we expect you see major announcements on store closures in the coming months in many areas. From the investment standpoint, the current management team has to work to clean up the mess from the former regime. This does not happen overnight. But buying the stock at these levels is speculating that management will be able to execute and fully right the ship. There are positives, such as being profitable and some improvements on the cash flow side. There are plans in place to try and turn things around. But the gravity on this Walgreens Boots Alliance, Inc. chart is strong. We suspect you see some dead cat bounce action and savvy traders can consider taking advantage of that. But otherwise, there are just too many companies growing and operating well that we see no reason to speculate here. Our “rating” here is a do not buy. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Buy cryptocurrency

Source link

Refer And Earn Demat Account – Get ₹300 | Referral Program

Open Demat Account In Angel One For FREE