Walgreens Boots Alliance (WBA 0.57%) has struggled with growth over the years. That issue has trickled down to the bottom line as well and profits also haven't been great. To help resolve this problem, the multinational holding company focused on retail and pharmaceutical services is pivoting to get deeper into healthcare. Part of that pivot includes plans to open hundreds of health clinics located at select pharmacy locations.
It's a long-term strategy that looks to capitalize on its brand of being a trusted neighborhood pharmacy. But here's why it could prove to be a risky strategy for the business and the stock.
Walgreens has already spent billions on this venture
In 2021, Walgreens announced an ambitious goal of launching 1,000 primary care practices at a select group of its 12,500 locations by 2027. To do so, it partnered with primary care operator VillageMD, investing $5.2 billion into the company.
A year ago, VillageMD announced plans to acquire Summit Health, a primary, specialty, and urgent care provider, for roughly $9 billion. Walgreens, to help support the acquisition, invested $3.5 billion through a combination of debt and equity. Investing in healthcare and building out its operations is proving to be a costly venture for Walgreens. And that's a problem given the company's already concerning financial position.
Walgreens is bleeding cash and incurring losses
When Walgreens reported fiscal 2023 fourth-quarter earnings last month, its financials didn't look particularly impressive. Its cash and marketable securities totaled approximately $740 million as of the end of the period (Aug. 31). A year ago, it had nearly $2.5 billion from its cash and investments.
What's equally concerning is that the company isn't profitable. The business was doing well when vaccinations were leading to a surge in traffic to its stores. But last quarter, it incurred a net loss of $208 million. While that was an improvement from the $501 million loss it posted a year earlier, that's not good enough for a company that is investing heavily into its healthcare expansion while also paying investors a dividend -- which costs Walgreens $415 million every quarter.
Profitability for Walgreens' healthcare business is uncertain
The company forecasts that its U.S. healthcare business will achieve breakeven in fiscal 2024 (Walgreens' year ends in August). It expects adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be within a range of negative $50 million and positive $50 million, with breakeven being the midpoint of that guidance.
But investors should note that this is not just EBITDA, it is adjusted EBITDA, meaning that it is not true accounting profitability that the healthcare business will reach this fiscal year. The company is being cagey about its plans beyond the current fiscal year. It doesn't offer any long-term guidance, only stating that it will continue to monitor and evaluate macroeconomic conditions.
Amid its cash troubles, management is looking for more ways to save money. One of the surprising ways is by closing 60 VillageMD clinics, which it says are already underperforming. In addition, it says it's going to exit five markets related to its healthcare business. Management projects this strategy will help the company save $1 billion in expenses.
However, it doesn't inspire much confidence that at such an early stage of its healthcare strategy, Walgreens is already cutting back on stores and exiting markets. This suggests that perhaps it may have been too aggressive in its initial plans. Now, with a new CEO at the helm, there could be even more changes ahead for the business.
Is Walgreens Boots Alliance stock worth investing in today?
There's a boatload of risk and uncertainty facing Walgreens right now. Its operations are unprofitable, its healthcare operations may only be profitable on an adjusted basis, and the dividend looks questionable.
Unless you're a contrarian investor who is comfortable taking on a whole lot of risk, you may be better off simply taking a wait-and-see approach with the stock, as there could be more changes coming now that a new CEO is in charge. Once there's more clarity on how the company is doing and the direction it's going in, it could make sense to reassess the stock at that point. For now, there's just too much risk for this to be a suitable stock for most investors.
