Walgreens Boots Alliance (WBA 0.57%) needs a way to convince investors that it has a plan to turn things around. The business isn't doing well. There are doubts surrounding its dividend. Meanwhile, the company is focusing on expanding as it continues to launch primary care clinics at its stores.
The business looks to be struggling badly and the stock has been in free fall for years. But with management committed to making more cost reductions, could this be an underrated investment to buy right now?
Underwhelming Q4 earnings results
Last week, Walgreens reported its year-end numbers for the fiscal year ended Aug. 31. Quarterly revenue of $35.4 billion rose 9% year over year but the company still incurred a net loss of $180 million. Although that was an improvement from the $415 million loss it reported in the prior-year period, it's a sign that the business still needs to reduce more costs.
And cost-cutting is what Walgreens plans to do. The company, which is in the midst of a CEO transition, projects that it can achieve $1 billion in cost savings next fiscal year. Hopefully, that should get the business back to being profitable.
Facing a tough road ahead
Year to date, shares of Walgreens are down close to 40%. And over the past five years, they have plunged by around 70%. The business is facing some serious challenges in an increasingly competitive space, with both Walmart and Amazon taking more of an interest in healthcare. Meanwhile, one rival, CVS Health, has been getting bigger and diversifying into health insurance, home health, and other businesses via acquisitions. Another competitor, Rite Aid, recently filed for Chapter 11 bankruptcy protection.
Investors may be concerned that Walgreens is following the path of Rite Aid more than it is the path of CVS. The biggest hurdle for the business is undoubtedly profitability. Although Walgreens is cutting costs, it's also going to be spending more to support the expansion of its U.S. healthcare business, which generated just under $2 billion in revenue last quarter and recorded an operating loss of $294 million.
Can Walgreens' business recover?
For Walgreens' stock to bounce back, it needs to show investors that it can find a way to balance its healthcare expansion with keeping its costs under control. And right now, it simply isn't there. Even its core U.S. retail pharmacy division incurred an operating loss of $317 million last quarter. The only segment that was profitable was its international business, which reported an operating profit of $222 million.
In prior years, the big problem with Walgreens has been its razor-thin margins, which have left little room for error. And that's still a problem today, as its retail pharmacy business isn't generating sufficient profit to support the company's growth initiatives.
Should you buy Walgreens' stock?
Walgreens is a cheap-looking stock, trading at 6 times its estimated future earnings. Its lofty dividend yield of 8.3% also looks attractive. But those numbers mean little if the business isn't doing well. If Walgreens continues to struggle, the earnings multiple will likely get worse, and management may end up cutting the dividend.
A new CEO, Tim Wentworth, is taking over, and time will tell what the strategy going forward will be. Odds are that some change will occur given the lack of investor confidence in Walgreens' stock right now.
Investors are better off waiting to see what the direction of the company will be under the new management. And unless it becomes even more aggressive with respect to slashing costs, I wouldn't take a chance on Walgreens because the business needs a clear direction and plan for how it will post profitable and consistent results.
Until then, I'd suggest just keeping this stock on your watch list -- and away from your portfolio.
