Shares of Walgreens Boots Alliance (WBA 0.57%) look incredibly inexpensive. Based on the midpoint of the retail pharmacy chain's full-year adjusted earnings guidance, the stock trades at a price-to-earnings ratio of just 7. Add in a dividend yield of about 6.7%, and there's a lot to like on the surface.
This rock-bottom valuation could be a sign that Walgreens is a value stock, but I'm not so sure. The company is facing serious issues, and the long-term picture doesn't look all that bright.
Cutting guidance and slashing costs
There's a good reason why Walgreens trades at such a depressed multiple of earnings: Earnings are in decline. The company's latest guidance calls for full-year adjusted earnings per share between $4 and $4.05, down from the previous range of $4.45 to $4.65. Both ranges represent a decline from 2022 when the company reported adjusted earnings per share (EPS) of $5.04.
Walgreens is actively working to reduce its costs. Along with its results for the fiscal third quarter, which ended May 31, the company increased its cumulative cost-cutting target from $3.5 billion to $4.1 billion. These cost cuts won't help the bottom line this year, and fiscal 2024 is also looking rough. While Walgreens expects adjusted operating income to slightly increase next year, adjusted EPS won't rise as quickly.
Looking at Walgreens' third-quarter results, it's hard to be excited about a potential turnaround. While sales rose 8.6% year over year, gross profit was flat and operating costs rose slightly. U.S. retail sales were down 1%, hurt by consumers pulling back on spending, while U.S. pharmacy sales rose 6.3%, thanks to inflation in branded drug prices. Total prescriptions filled increased by just 0.1%.
The healthcare business, fueled by a string of acquisitions, is doing better. Sales rose 22% on a pro forma basis to $2 billion. Unfortunately, healthcare accounts for less than 6% of Walgreens' total revenue, and the segment posted an adjusted operating loss of $172 million. It's not big enough to move the needle on the top line and drag down the bottom line.
Hard to be optimistic
Is Walgreens a company in decline? That's the question that investors ultimately need to ask themselves. If the best Walgreens can do is muddle through, cutting costs and trying to prop up earnings as much as possible, even 7 times earnings might be too much to pay.
It's not clear what a Walgreens turnaround even looks like. Cost-cutting alone doesn't drive turnarounds. Retailers that cut costs and do little else end up driving customers away with a worsening experience. The company's healthcare business is a bright spot, but it's too small to matter right now, so Walgreens is resorting to cutting costs there, as well, as it tries to turn the business profitable.
Walgreens stock is cheap, but it's probably not a good value. The company just doesn't have a compelling story to tell. When all management can talk about are cost cuts, synergies, and efficiencies, it's time to move on and look for better long-term investment opportunities.
