Walgreens Boots Alliance (WBA +0.00%) has a new CEO who isn't afraid to make big moves, like cutting the company's dividend, which it had been growing for decades. There are rumors that a recently acquired business unit could be on the chopping block, and there could be fewer pharmacy retail locations as well.
What should investors expect from the company over the course of the next decade, and would investing in the stock now be a good idea?
NASDAQ: WBA
Key Data Points
Expect a leaner, smaller footprint
One of the things that's likely to happen over the next decade is that Walgreens becomes smaller in size. The company has a lot of physical store locations, but that means a higher level of staffing needs and resources. It also comes with more costs and challenges.
At a time when companies are looking for leaner, more efficient options (e.g., Starbucks launching more drive-thru-only locations), it would be puzzling if Walgreens didn't consider similar moves. In the past, the company has piloted drone delivery, and that would be a logical growth opportunity for the business to help deliver essentials, including pharmaceuticals, to nearby customers.
At the very least, investors should brace for fewer stores. New CEO Tim Wentworth, in a recent interview with Jim Cramer, said the company is closing 200 stores this year but is also looking at locations where it can potentially consolidate stores based on geography. As of Nov. 30, 2023, the company had 8,631 stores in its U.S. retail pharmacy division, down from 8,817 a year earlier.
How much lower that number goes is the big question, but a decade from now I would expect a sizable reduction of storefronts for Walgreens, perhaps with some locations converted to smaller sizes that are conducive for delivery and pick-up orders.
The company will likely need to sell assets
Given Walgreens' tough financial shape -- it is incurring losses and burning through cash -- I also expect the company will need to divest assets to strengthen its cash position. As of the end of last quarter, Walgreens reported just $784 million in cash and cash equivalents, and it burned through $281 million through just the most recent three-month period.
In the past, Walgreens has looked at selling its Boots UK pharmacy chain only to end up keeping it. But under the new CEO, the company looks to be considering a sale once again. To reduce complexity and cash burn in its business, this seems like a probable move for Walgreens as it could generate billions. Walgreens reportedly believes the business could be worth approximately 7 billion pounds ($8.9 billion).
Another move Walgreens is reportedly considering is the sale of Shields Health Solutions, a specialty pharmacy business it fully acquired in 2022. It could fetch up to $4 billion for Walgreens, according to reports.
If Walgreens can close on these deals, it will not only simplify its business model but will also get an important infusion of cash at a time when it desperately needs it. In order to grow its healthcare business and launch more clinics, plus pay a dividend, Walgreens will need all the cash it can get. The new CEO appears to be tipping his hand that asset sales and reducing the number of stores is the right path for the company.
Is Walgreens a long-term buy?
If Walgreens becomes smaller and more efficient, that should help improve cash flow and profitability, which will be key to growing the company's future valuation. Assuming that does happen, Walgreens could make for a good contrarian stock, but it does come with a fair bit of risk as transition strategies don't always play out according to plan. If you're comfortable with that risk and uncertainty, it could be an opportune time to invest in Walgreens as it trades at levels it hasn't been at since the late 2000s.
But if you're more risk-averse, you may want to hold off until you see some of these moves come to fruition and for improved results that may suggest the business is on the right track. There's reason to be optimistic that under Wentworth, Walgreens may be on a much better path forward, but it's far too early to declare success just yet.
