Walgreens Boots Alliance (WBA 0.57%) stock is struggling. That's putting it lightly as the shares are trading at levels they haven't seen since the previous millennium. Buying on the dip simply hasn't worked for investors over the past few years because the pharmacy retailer's stock has continued to fall to new lows.
But could that be about to change? Could now, after the company has made multiple adjustments, be an optimal time to take a contrarian stance and assume that it may have finally bottomed out? Or is Walgreens a stock that's still too risky to invest in?
What is Walgreens' biggest problem?
One thing that has always troubled me about Walgreens as an investment and that has prevented me from wanting to own the stock is that the business's fundamentals have never been all that strong. In retail, companies have to fight for customers and that puts pressure on margins. Even though Walgreens focuses more on the healthcare and pharmacy side of things, that hasn't made things any easier.
WBA Gross Profit Margin (Quarterly) data by YCharts
Over the past decade, Walgreens' gross margins have been shrinking and unsurprisingly, that hasn't done any favors for its profit margin, which has struggled to stay above even a few percentage points.
Walgreens' low-margin business is problematic because without the massive volume of an Amazon or Walmart, it can be incredibly difficult for it to turn a profit, which is necessary to pay its dividend and support its long-term growth objectives.
Why all hope isn't lost for Walgreens
There is some reason for optimism that Walgreens can turn things around before it's too late. New CEO Tim Wentworth has shown he isn't afraid of making difficult decisions. At the start of the year, the company slashed its dividend. Previously, Walgreens had been growing its dividend for decades and abruptly putting an end to that wouldn't have been an easy choice to make. But it was necessary given the company's underwhelming financials.
Walgreens is also reportedly considering the sale of assets, including spinning off its Boots UK segment, which could generate billions in cash. Moves like that could bolster Walgreens' financial position and give it the resources necessary to build out its healthcare business, which includes the launch of hundreds of primary care clinics at its stores. But while selling assets will add to its cash flow, those are temporary measures that still don't fix the company's core problems relating to its low margins and modest volumes.
These are, however, still the early innings of what's likely to be a long and complex turnaround plan for the business; Wentworth only took over at Walgreens in October 2023. It could take a while, but there's some hope that with new management in charge, the company could be on a better path forward.
Investors are better off steering clear for now
Walgreens is an intriguing healthcare stock to watch right now given the changes the business is undergoing. But whether the company can turn things around isn't yet clear.
I'd like to see Walgreens get much smaller and scale down significantly (i.e., decrease the number of locations it has) to get rid of a lot of overhead and reduce the number of items it carries to focus primarily on higher-margin products. By running a leaner operation, the business could be more likely to turn a profit and become a more sustainable investment.
Right now, Walgreens is still too big, and until the company drastically improves its margins and prospects for long-term profitability, this is a stock I'd stay away from right now.
