News

Shares of Walgreens Boots Alliance (NASDAQ: WBA) plunged 25.4% in June, according to data from S&P Global Market Intelligence .

News went from bad to worse for Walgreens, which had already been down severely on the year even before the month started. And after another plunge during the last three days of June, the stock was off 54% in the first half of 2024, making it the worst performer in the S&P 500.

While pessimism already abounded, Walgreens' fiscal third-quarter results on June 27 only added to its shareholders' woes, with the stock taking yet another leg down.

Taking down guidance again

In the third quarter, Walgreens posted revenue growth of 2.6%, which was actually ahead of expectations. The problem was on the bottom line, where adjusted (non-GAAP) earnings per share of $0.63 was down a whopping 36.6%, missing even pessimistic analyst expectations of $0.71. Furthermore, the company lowered its full-year adjusted earnings guidance for the second time in 2024 to a range of $2.80 to $2.95, down from the $3.20-to-$3.35 range it had guided in March -- and that was already lowered from the original guidance of $3.40 to $3.50.

How did revenue increase while profit decreased? Much of the pressure was felt in Walgreens' pharmacy business, where the concentrated pharmacy benefit manager (PBM) industry is squeezing pharmacies on reimbursement rates. The phenomenon is an industrywide problem. However, unlike some other retail pharmacies, Walgreens doesn't own one of the major PBMs, so it's seeing margin plummet in that important business. Meanwhile, Walgreens also saw its retail sales decline 2.3%, as a cash-strapped consumer appeared to pull back on more discretionary pharmacy purchases.

Moreover, the company's acquisition of pharmacy care clinic VillageMD continues to struggle, with the healthcare clinic segment garnering a $220 million operating loss last quarter. While that was a $300 million improvement over the prior year, it still leaves the debt-laden company with an unprofitable unit to deal with.

Walgreens has a new CEO, but a turnaround is uncertain

On the bright side, Walgreens still forecasts a profitable year, and it has a new CEO in Tim Wentworth, who took over last October, so he hasn't had much time to implement a turnaround. Moreover, Wentworth used to head Express Scripts, one of the three big PBMs, and which is currently owned by Cigna. With PBM experience, he may be able to help reverse the trends that have favored PBMs relative to retail pharmacies.

Still, Wentworth has his work cut out for him. Walgreens is nearly $9 billion in debt, not counting operating leases, and its margin is squeezed, so investors would be wise to wait for signs of tangible progress on operational improvement and profitability before trying to time this turnaround.

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