Pharmacy giant Walgreens (WBA 0.57%) has been going through a huge business transition over the last few years. In mid-2023, things really started to change at the company, with a CFO transition announced in late July and the abrupt departure of the CEO announced at the start of September. There was no replacement for the CEO at the time. Now that there is a new CEO in place, investors should appreciate that there are a lot of moving parts right now.
Walgreens' biggest change agent takes off
For many years, Walgreens has been looking for a way to grow. At one point the hope was that entering the pharmacy benefits management business would be the right move. It wasn't, and the company ended up selling the dedicated division it built up. It then shifted to creating a business around medical services, basically buying and building medical clinics in and near its pharmacies. Peer CVS (CVS -0.22%) is taking a similar approach.
Image source: Getty Images.
The goal is to have greater reach into customers' medical lives. That builds on the demographic trend toward a generally older society, since older people tend to need more medical care than younger ones. It may also allow Walgreens to direct more prescriptions to its own pharmacies. And the more people who walk through its stores, the more opportunity it has to sell the non-prescription items that fill out the rest of its retail business. It isn't a bad plan, though it is still largely untested because the effort is very new.
That said, the person behind this new plan just left the company in a manner I found shockingly abrupt. Indeed, there was no successor in the wings waiting to step into the role. Add in the earlier departure of the CFO, and it looks suspiciously to me as though the board lost confidence in the now-departed CEO and broader leadership team that was in place.
Where does Walgreens go from here?
Here's the interesting thing: When the company reported its full-year fiscal 2023 results, it still hadn't brought a new CEO onboard. The company was working with a temporary CEO and a temporary CFO. These are two of the most important decision-makers at a company, and while they did a solid job of reporting what had happened, the temporary nature of their positions meant that any guidance they provided was likely to be less well-informed by future corporate strategy. Not wrong, per se, but they certainly had no way of knowing what the next CEO would want to do and the effect that would have on financial results. That's probably why the company only provided guidance through fiscal 2024 and largely refrained from comments beyond that.
Even that fiscal 2024 guidance has to be taken with a grain of salt now that the new CEO, Tim Wentworth, has finally started. It is highly likely that he will be taking some time to get to know the company more deeply before he makes any big decisions. But at some point, he is going to put his stamp on the company's business plans. That is, after all, why the board hired him.
But there's a problem here for investors. What value can you place in the guidance for fiscal 2024? The new CEO isn't going to just stick to that outlook if he plans to go in a different direction. And if he's like most new CEOs, he is highly likely to try to put as much bad news up front as possible, since he can, effectively, blame it on the past regime. So if there's anything negative that hasn't yet come out, it could soon, and that would effectively make the current guidance obsolete as well.
Get ready for more potentially bad news
One issue that should be particularly troubling for investors is the dividend, the sustainability of which some have questioned. That remains true even though the interim CEO made sure to point out that no changes were being made when pressed on the topic during the earnings call. Simply put, a brand-new CEO announcing a business reset would likely have an easier time justifying a dividend cut to the board than the interim CEO.
If you are a shareholder, you can't put too much faith in any of Walgreens' past guidance. And given the company's recent business and management changes, it's likely that the new CEO will take a different approach to running the company. That introduces material risk that guidance will likely change, and you might even end up seeing a rough first-quarter earnings update from Walgreens in the near future.
