Walgreens Boots Alliance (NASDAQ:WBA) stepped up to the plate Tuesday morning and promptly struck out on three straight pitches. Wallgreens missed revenue estimates, missed earnings estimates and had a poor 2019 forecast. And down goes WBA stock.
Going into its Q2 2019 earnings report, analysts were forecasting $1.72 in earnings-per-share on $34.56 billion in revenue. Walgreens delivered earnings that were 10 cents shy of the mark at $1.62, while revenues missed by $30 million at $34.53 billion.
A quick 0-2 count.
Then, CEO Stefano Pessina provided a dire forecast for the remainder of fiscal 2019, which included cutting EPS growth from 7-10% on the year to no growth.
Swing and a miss. Strike three. Walgreens’ is out.
Many consider WBA stock to be a value play. These latest numbers suggest it’s a value trap. Is there any hope for the drugstore chain now that it’s set to drop below $60 for only the second time in five years?
Let’s consider the possibilities.
Can CBD Save Walgreens?
Well, you’d be crazy not to consider the possibilities. The fight for space on the Cannabis ship is intense. Everyone wants in on the action. It’s arguably the most prominent “new” industry to come along where so many different groups are set to profit: producers, marketers, investors, retailers, wholesalers, food and beverage companies … the list goes on.
How does cannabidiol elbow in on the action?
The company is going to offer CBD products in states where it’s legal. That currently works out to 1,500 stores in nine states. Now, it’s important to remember that these products don’t contain THC or tetrahydrocannabinol, the psychoactive ingredient that gets you high.
CBD’s sole purpose is medicinal. You won’t get high using them. They are merely therapeutic.
Nonetheless, the CBD market is significant and probably bigger than any of the experts realize. Until they’re readily available in all 50 states, we are only seeing the tip of the iceberg. My InvestorPlace colleague James Brumley recently estimated the CBD market could grow to anywhere from $16 billion to $25 billion annually by 2025, perhaps earlier.
Like almost every statistic mentioned about cannabis today, they’re merely educated guesses. Long-term, I see these numbers being on the low side because once people realize there are products to relieve pain that aren’t nearly as addictive as the ones pushed by Big Pharma, the departure will be tremendous.
It’s important to remember that others, like CVS Health (NYSE:CVS), are getting into CBD retail. It’s going to be a battle for the consumer’s dollar like every other product sold in either pharmacy. It’s also important to remember that Walgreens’ annual revenue was $135 billion over the trailing 12 months. CBD will be a small piece of an enormous pie.
But, there’s no denying the potential. It would be business suicide not to participate in this modern-day Gold Rush.
The Transformation Continues
Walgreens stated in its Q2 2019 press release that it is increasing its targeted annual savings from $1.0 billion to $1.5 billion, a target it expects to achieve by fiscal 2022, three-and-a-half years from now. That will undoubtedly help keep profits moving higher.
On the revenue side, Walgreens’ same-store sales declined 3.8% in the second quarter blaming a weak flu season, lower tobacco sales, and less seasonal merchandise getting sold for the drag on comps over last year.
Clearly, Walgreens and its peers are having difficulty engaging the consumer to the point of growing same-store sales. That doesn’t mean Walgreens is done for, but CEO Pessina better work quickly to deliver enough of a transformation that growth turns positive in the next two to four quarters.
Here’s what he said about the company’s ongoing transformation:
“We are focusing on our operational strengths and addressing weaknesses, making a number of senior appointments to bring change and accelerating the digitalization and transformation of our business … As a result of these actions, our business model will deliver improved performance in fiscal 2020, positioning us for mid-to-high single-digit growth in adjusted EPS in the following years.”
Last July, I called Walgreens’ CEO one of the most successful people in business. Facing probably the toughest challenge of his career, I don’t see Pessina failing in his efforts to transform the company.
It’s going to take time, but long-term, you’ll do well with him in the top chair.
The Bottom Line on WBA Stock
Walgreens’ revenue miss is insignificant. It’s nothing in the scheme of things. The same-store sales growth contraction is the problem. As for the earnings, that’s a bigger deal. It means that the cost savings aren’t coming as fast as they’d like. Not to mention gross margins aren’t what they should be.
However, these are all fixable over time.
If you own WBA stock, I’d stay the course. If you don’t, it’s probably going to fall a bit more before stopping the bleeding. If you thought it was cheap before earnings, you should probably buy a little now and hope you can get some more in a week or two.
Under $50, WBA stock is a downright steal.
At the time of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
