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Shares of Walgreens Boots Alliance (NASDAQ: WBA) were hammered about 20% lower on June 27. Investors were responding to a lowered forward outlook, and it isn't the first time in recent memory that the company's given shareholders disappointing news.

When the market closed on June 27, shares of Walgreens stock were down by 60.5% from a peak they set last summer. At its beaten-down price, the stock offers a huge 8.2% dividend yield.

You wouldn't know by looking at its stock chart, but Walgreens still owns an enormous chain of retail pharmacies. Could it be a good stock to buy on the dip and hold for the long run? Before we can answer that we need to understand the reasons it's been beaten down.

Why Walgreens Boots Alliance stock is getting hammered

If there's one thing Wall Street hates, it's uncertainty. The bottom fell out from under Walgreens stock on June 27 because management lowered its earnings outlook for the second time this year.

In January, Walgreens told investors to expect adjusted earnings to land in a range between $3.40 and $3.50 per share. In March, the company lowered its outlook to a range between $3.20 and $3.35 per share.

The first earnings outlook adjustment this year was disturbing, but the latest one is downright frightening. On June 27, management slashed its adjusted earnings outlook for fiscal 2024 by about 12% to a range between $2.80 and $2.95 per share.

Walgreens CEO Tim Wentworth blamed U.S. consumer pressure, which means inflation, and marketplace dynamics, which means pharmacy benefits managers (PBMs), for the losses. Inflation is subsiding, but the challenges PBMs lay on the retail pharmacy industry probably aren't going to improve in the foreseeable future.

There are three large PBMs in America. CVS Health owns the largest one. OptumRx from UnitedHealth Group and Express Scripts from Cigna are the next largest. By representing large swaths of a pharmacy's potential customers, PBMs can negotiate the reimbursement rates pharmacies receive when they fill our prescriptions.

Walgreens doesn't own a vertically integrated PBM, which means its pharmacy business will rise and fall at the whims of CVS Health, UnitedHealth Group, and Cigna.

During the nine-month period ended May 31, Walgreens reported U.S. pharmacy sales that rose 4.4% year over year. Reimbursement rates have been so unfavorable, though, that operating income from the U.S. pharmacy segment fell 38% year over year.

Unfavorable reimbursement rates from PBMs it doesn't control aren't the only challenge Walgreens is facing lately. Walgreens had attempted to become more than just a retail pharmacy business by providing health benefits at VillageMD clinics located next to its pharmacies. Earlier this year, the company reported a $5.8 billion impairment to its VillageMD investment and announced it would close 160 of those clinics.

Reasons for hope

Before coming to Walgreens last October, Wentworth had been president and CEO of Express Scripts and Cigna. With less than a year at the helm, his plan to streamline the company's struggling health clinic business hasn't had a chance to prove itself yet.

It's hard to say how Walgreens' plans to expand beyond the seemingly doomed retail pharmacy industry will work out. One thing we can expect, though, is significant cost-cutting. The company is on pace to achieve $1 billion in cost savings this year.

After watching Walgreens post heavy losses, the market isn't expecting much from this ultra-high-yield dividend payer. The stock has been trading for just 4.3 times the midpoint of management's adjusted earnings expectation for fiscal 2024, which ends on Aug. 31.

Investors who buy this stock at its remarkably low valuation could realize market-thumping gains over the long run, but only if earnings stop shrinking. Instead of risking your money now by trying to catch this falling knife, it's probably best to wait at least a couple more quarters to see if Walgreens can turn itself around.

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Cory Renauer has positions in CVS Health. The Motley Fool recommends CVS Health and UnitedHealth Group. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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