5 things you need to know if you shop Walgreens today

With shares trading at multi-year lows leading to a dividend yield of nearly 12%, Walgreens Boots Alliance (NASDAQ: WBA) it has probably appeared on the radar of some value investors. As a result, some of them might consider investing in stocks at these levels.

Before making any decisions about Walgreens, investors may want to look at five things about the company that could affect their choice.

1. Stocks are trading down 85% over the past decade

The stock has lost about two-thirds of its value so far in 2024, but Walgreens’ woes extend well beyond this year. The stock has lost 85% of its value over the past decade and is trading at the same level it was in 1996.

Walgreens stock hit an all-time high of $96.68 in August 2015, but it’s been all down since then. Its peak came after it bought the remaining 55% stake in British drugstore Alliance Boots just before the end of 2014.

2. Repayment pressures were the company’s biggest problem

The biggest problem facing Walgreens has been consistent prescription drug reimbursement pressure, which it has complained about since at least early 2016. Drug reimbursement prices have been pushed down by companies pharmaceutical benefit managers (PBMs), who in the past were hired to negotiate lower prices and costs for their health insurance provider clients.

However, the industry today is controlled by three PBMs, all of which are now owned by companies that also own health insurance businesses. Together they control nearly 80% of the market and have relentlessly driven down reimbursement rates to pharmacies to the point where, in some cases, pharmacies are losing money filling certain scripts. For its part, Walgreens said it loses more on every script it fills for popular GLP-1 drugs like Ozempic.

Reimbursement pressures can be seen in Walgreens’ gross margins over time. Over the past decade, its gross margins have grown from 28.2% in fiscal 2014 to 19.5% last fiscal year, which ended in August 2023. The company will report its fiscal 2024 results next month.

This has not only hurt Walgreens, but smaller independent pharmacies as well. CVS Health has done better than most, but that’s because it not only owns a pharmacy, but also owns the largest PBM with Express Scripts, as well as health insurance provider Aetna.

Right now the reimbursement model is broken and destroying the pharmacy industry. For his part, current Walgreens CEO Tim Wentworth hopes to transition reimbursements to a cost-plus model, where pharmacies would be paid for the role they play in reducing inflationary pressures on drug prices and the services they provide . Wentworth was previously the CEO of Express Scripts, so he knows the PBM business and their relationship with pharmacies as well as anyone.

The story continues

It doesn’t seem like it would be beneficial for PBMs to run pharmacies completely out of business, but change takes time. Meanwhile, government regulators have largely stood still to pursue it, apparently more concerned with the antitrust battle with the big tech companies.

3. Walgreens made a poor investment in VillageMD

In an effort to expand beyond pharmacies struggling with reimbursement pressures, Walgreens’ previous management also made a very poor investment when it bought a controlling stake in VillageMD, an owner of health care medical clinics primary, which gathers other competitors in an attempt to expand. The plan was for Walgreens to create a network where it could control the continuum of care, from doctor to pharmacy and places in between.

However, expansion for VillageMD beyond its original markets proved unprofitable, and the company began closing clinics as losses began to pile up. To make matters worse, this summer Walgreens disclosed that VillageMD had defaulted on a $2.25 billion secured loan it made to the company. Meanwhile, Walgreens management said the company would consider selling some or all of its stock in VillageMD.

4. The company plans to close unprofitable locations

As part of Walgreens’ turnaround strategy, the company plans to close a significant number of stores over the next few years. It has indicated that nearly 25% of its locations are unprofitable and that it will look to close stores that are too close, unprofitable and/or experiencing too many theft problems.

Closing unprofitable stores should add to the churn and also lead to an increase in same-store sales ratios as some sales move to nearby stores. With lower fixed costs from fewer stores, this should lead to improved profitability over time.

Meanwhile, the pharmacy industry as a whole is shrinking its store base, with CVS closing stores in recent years and Rite Aid is preparing to close up to 500 locations after filing for Chapter 11 bankruptcy protection last year. More sales in fewer stores should ultimately help the drugstore industry and Walgreens.

5. The stock looks incredibly cheap

Walgreens’ struggles have put the stock in the deep discount aisle. It trades at a forward P/E of less than 4.5 times earnings, based on analyst estimates for this fiscal year, and a similar multiple of company value to EBITDA (earnings before interest, taxes, depreciation and amortization). Enterprise value takes into account net debt.

Given its valuation, I think investors stand to gain if the company is able to shed only the negative parts of its business, such as VillageMD and unprofitable stores. In the meantime, if anyone can help change the reimbursement model, it should be Wentworth, given its PBM track record.

This is not an easy fix, and the company may well cut its dividend again to conserve cash, but it still has leverage to pull to help the share price and get the company on a better financial footing , including the sale of its non-pharma businesses or even the sale of Alliance Boots in the UK. As such, I would view the stock as a speculative buy for investors who are okay with some near-term volatility.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.

5 Things You Need to Know If You’re Shopping Walgreens Today was originally published by The Motley Fool