April started poorly for Walgreens Boots Alliance (NASDAQ: WBA). A weak second-quarter earnings report sent Walgreens stock down 12.8% on April 2. With a downtrend very clearly in place, why should investors even consider WBA stock after the plunge?
Walgreens reported non-GAAP earnings of $1.64 as revenue grew 4.6% to $34.53 billion. A confluence of negative headwinds hit the company’s bottom line. Higher reimbursement pressures, lower generic deflation, lower brand inflation and weak performance from restructuring programs led to the poor results.
Markets now know why Walgreens, along with CVS (NYSE: CVS) and Rite Aid (NYSE: RAD) fell ahead of the results report. Markets even sold off health care plan stocks like Cigna (NYSE: CI) and Humana (NYSE: HUM) in 2019: there are significant market-wide headwinds.
Long-Term Growth and Walgreens Stock
Walgreens has four strategic priorities aimed at delivering sustainable, long-term growth. It is accelerating the company’s digital footprint, transforming its approach to retail, creating neighborhood health destinations, and implementing a revamped cost management program.
This jargon on cost reduction will not mean much to the shareholder who just lost 12.8%.
To stabilize the business as reimbursement pressures worsen, Walgreens must improve same-store sales. The near-term problems in achieving growth here are the acquired Rite Aid stores. Sales grew 7.3% and organic sales grew 1.6% but adjusted growth profit declined a substantial 3.5% in the quarter. Pharmacy and retail both fell. Gross margin from Pharmacy fell 260 basis points.
A 6.8% drop in SG&A spend, along with cost savings initiatives ahead may slow the weakening operating income, which fell 11.9% in the second quarter.
Opportunity and Walgreens Stock
A weaker cough, cold, and flu season added to Walgreens’ woes but could create an opportunity for value investors. Since results were so weak, Walgreens could move up from here if management moves swiftly to balance its operating expenses against the higher reimbursement pressure.
Digitization will help Walgreens increase its efficiency but it needs more than that. Still, bringing in the Microsoft (NASDAQ: MSFT) Teams to consolidate its internal digital team under a Chief Digital Officer will improve back-office efficiency.
Walgreens restructured management such that there are two teams in development and delivery. One accomplishment is that its 5-star rated app has 55 million downloads. Another is it has 85 million active Balance Rewards members. The drug store clearly has the potential to reach out to its customer base through the mobile app. What is not clear yet is how much more business the app will bring for Walgreens.
The weak current third quarter for Walgreens will follow with improvements in Q4. While investors are disturbed by management’s realistic goal-setting of mid-to-high single-digit growth, the reset in expectations creates an entry point for value investors.
Plus, with the company working to offset the generic impact by 50% – 60%, profit margins may start to stabilize. Overall, it plans to cut costs by $1.5 billion. That is a substantial number and will benefit the company’s long-term health.
Walgreens will also shift its resources towards growing its Health & Beauty segment where it is confident that it can win an already very attractive business.
The Bottom Line on Walgreens Stock
The analyst positional changes are mixed. According to Tipranks, one analyst called WBA stock a “sell” while six have a “hold” and two analysts have a “buy.” The average price target is $61 a share, which suggests the stock has an upside of 11%.
Patient investors may want to wait for the selling-pressure to ease for a few days. Walgreens is already trading at a discount but this could widen. Still, even though drug store stocks are out of favor, Walgreens is the strongest of the available picks.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.