Walgreens Boots Alliance Inc. (WBA, Financial) has been embarking on a transformative journey for years now, leveraging innovation and strategic investments to improve customer experiences, optimize supply chains and expand into the primary care market.
The main challenges so far have been profitability concerns (declining earnings per share) and high competition, which have kept the stock depressed. However, the company remains focused on delivering value to shareholders through cost savings, portfolio simplification and strategic investments. I believe these measures will pay off in the long run; here's why.
Progress on strategic priorities
Walgreens has made significant strides in transforming its core retail pharmacy business. The company has leveraged technology to enhance its pharmacy operating model, incorporating digital and telepharmacy capabilities. This move has allowed Walgreens to improve the customer experience and operational efficiency. Additionally, implementing micro fulfillment centers supporting over 40% of the store footprint demonstrates Walgreens's commitment to optimizing its supply chain.
Furthermore, Walgreens has taken steps to optimize its portfolio and capital allocation. The monetization of shares in AmerisourceBergen (ABC, Financial) and the exit from the Option Care Health (OPCH, Financial) position have generated substantial proceeds. Additionally, the announced sale of the Guangzhou Pharmaceuticals stake indicates a focused approach to streamlining the portfolio. These actions allow Walgreens to reallocate capital to areas that align with its strategic priorities and growth prospects.
Walgreens' focus on building a high-performance culture and a winning team is evident in its recent executive appointments. The alignment of enterprise business-to-business sales and contracting teams with health care expertise strengthens the ability to sell integrated services and improve payors and health systems outcomes. The appointments of Rich Rubino as chief financial officer of VillageMD and Beth Leonard as senior vice president and chief communications officer bring experienced professionals to key positions, enhancing Walgreens's leadership capabilities.
Long-term growth drivers
One of the major growth drivers for Walgreens is the development of consumer-centric health care solutions. The company's service offerings have resonated with payers, health systems and other partners, as evidenced by partnerships with Horizon Blue Cross Blue Shield, CareCentrix and several health system partners.
Walgreens has also made significant progress in its pharmaceutical pipeline, with eight contracts signed and outreach to a million potential trial participants. The company's acquisition of CareCentrix and integration of care delivery assets also position it to drive further growth.
Walgreens' core retail pharmacy business serves as a cornerstone of care delivery. The company's tech-enabled experience and trusted brand connection with consumers contribute to faster core growth and increased addressable value per customer. Walgreens aims to scale its next-gen care continuum by combining pharmacy and medical care through physical and digital points of care. This approach provides easier and extended access for patients and generates greater market access and partner interest through differentiated value-based care.
Additionally, the U.S. retail segment aims to grow gross profit through comp growth, margin improvement, category performance improvement programs and digital and omnichannel initiatives. The U.S. health care business is expected to scale rapidly, leveraging the company's trusted brand and high-quality assets to create synergies and become an independent partner of choice.
Finally, Summit Health is expected to drive meaningful growth, driven by the first full year of profit contribution, top-line growth at CityMD, improved clinic operations and multi-specialty sales growth. VillageMD is focused on optimizing regional density, exploring new models, driving patient panel growth and improving cost control to meet profitability goals.
Transformational actions
Walgreens Boots Alliance is undergoing a series of streamlining actions to drive shareholder value and position the company for long-term success. These actions include cost savings initiatives, portfolio simplification and strategic investments. Analyzing these factors is crucial to understanding the prospects of Walgreens, as its balance sheet looks truly dismal at first glance.
The company is focused on executing its Transformational Cost Management program to achieve $4.1 billion in cost savings. The program has been expanded, and the target for cost savings in fiscal 2024 has been raised to $800 million. This reflects the progress made so far and the identification of additional opportunities. These cost savings will help offset headwinds and provide fuel for growth investments.
Also, Walgreens is implementing organizational restructuring to better align with its strategic priorities. The company aims to streamline operations and improve efficiency by transforming its headquarters. The optimization of the labor model is another important aspect of Walgreens' transformation. By elevating pharmacist and patient engagement and leveraging AI and tech-enabled centralization, the company seeks to drive efficiencies and increase script uplift. The integration of AllianceRx and alignment with Walgreen's Specialty Pharmacy strategy will result in cost synergies through back-office integration.
Further, The company is also accelerating portfolio simplification efforts. Walgreens has agreed to sell its Farmacias Ahumada chain in Chile, with the transaction expected to be completed by the end of the calendar year 2023. This divestiture will allow Walgreens to focus on its core business.
Regarding capital allocation priorities, Walgreens focuses on core investments, debt paydown and dividend growth. The company makes disciplined, return-based investments in its core business, ensuring strategic alignment with its goals.
Looking ahead, the successful execution of these transformational actions could position Walgreens for a promising future in my opinion.
Risks and challenges
One key concern is that Walgreens pays a dividend despite being unprofitable. While Walgreens currently has a forward dividend yield of 6.62%, there is a risk that the dividend may become unsustainable if the company fails to resume profitability. This could put pressure on its financial position and impact shareholder returns.
The recent EPS figures for the third quarter of fiscal 2023 show a significant decrease compared to the same quarter a year ago. This indicates that Walgreens is facing challenges in generating profits and maintaining its earnings growth. The company has also revised its full-year adjusted EPS guidance downward for fiscal 2023, reflecting consumer and category conditions, a lower Covid-19 contribution and a more cautious macroeconomic outlook. These factors highlight the uncertainties and headwinds Walgreens is currently navigating.
Despite the challenges, the company believes it has sufficient financial resources to support its dividend payments and capital allocation priorities.
Takeaway
In conclusion, Walgreens has been actively transforming its business through various strategies such as leveraging technology, improving the customer experience, optimizing the supply chain and expanding health care assets. These initiatives aim to revitalize its retail pharmacy business and position the company for growth. These growth initiatives have not yet translated to a higher stock price as Walgreens' bottom line is in decline and its debt is rising, but I have faith it can turn itself around. Despite short-term declines in market valuation, these transformative actions are breeding long-term growth potential.
