Walgreens Rallies on Store Closure Plan. Is the Stock a Buy Now?

It's been a very difficult year for Walgreens Boots Alliance (NASDAQ: WBA), but the stock was climbing higher following its fiscal fourth-quarter earnings report and the details of its store closure plan. Nonetheless, the stock is still down about 60% year to date.

Let's look at Walgreens' most recent quarterly report, its store closure plan, and whether or not it's time to buy the stock.

Earnings and store closures plan

The issues that have been hampering Walgreens didn't go away in fiscal Q4, ended Aug. 31, but the pharmacy operator was nonetheless able to top expectations.

For the quarter, Walgreens' revenue climbed 6% year over year to $37.55 billion. However, adjusted earnings per share (EPS) plunged 40% to $0.39, as its margins continue to be squeezed by reimbursement pressures. However, the results topped the analyst consensus, which was calling for adjusted EPS of $0.36 on revenue of $35.76 billion.

U.S. retail pharmacy sales jumped 6.5% year over year, with same-store sales soaring 8.3%. Comparable pharmacy sales jumped 11.7%, while comparable retail sales were down 1.7%. Adjusted operating income sank 60.4% year over year to $220 million, hurt by pharmacy reimbursement pressures and a challenging retail environment.

International sales rose 3.7% year over year, with Boots UK sales up 2.3%. Boots retail same-store sales were up 6.2%, while pharmacy same-store sales climbed 10%. International adjusted operating income dropped 10.6% year over year to $231 million, largely due to a lack of real estate gains in the quarter.

Revenue from its U.S. healthcare segment rose 7.2% year over year to $2.1 billion, with adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $65 million, an improvement from negative $29 million a year ago. VillageMD revenue grew 7% year over year, while Shields revenue soared 24%.

Gross margin fell to 16.7% from 18.6% a year ago. Gross margin in its U.S. retail pharmacy business dropped to 16% from 18.4%. Continued drug reimbursement pressure and its impact on gross margin has been the biggest issue facing Walgreens.

Image source: Getty Images.

Walgreens generated $1.1 billion in free cash flow in the quarter and $23 million for fiscal 2024. It ended its fiscal year with $9.5 billion in debt and $3.1 million in cash and marketable securities.

In response to the gross margin pressure, the company has been cutting costs and said it surpassed its goal of reducing expenses by $1 billion. While it is continuing to discuss alternative reimbursement models with pharmacy benefit managers (PBMs), the company will in the meantime look to shutter 1,200 of its 8,700 stores that it said are unprofitable. This includes closing 500 stores in fiscal 2025.

The company forecast fiscal full-year adjusted EPS of $1.40 to $1.80 on sales of $147 billion to $151 billion. Analysts were expecting adjusted EPS of $1.72 on revenue of $147.3 billion.

Is it time to buy Walgreens stock?

Closing stores should be a nice addition by subtraction for Walgreens. It will help the company in two main ways. The first is that closing money-losing stores will immediately help its earnings. Second, once a store is closed, it should help boost the traffic of nearby stores, which will help its same-store sales and boost profits as well.

As such, Walgreens should become a smaller company by revenue, but ultimately more profitable. Exiting its majority stake in VillageMD would also be another potential addition by subtraction, although the business appears to have stabilized. However, the company plans to try to sell the business in order to pay down debt.

Reimbursement pressure remains the biggest challenge for Walgreens and it will continue to try to move PBMs to alternative models where it will get paid for the value it adds. Management has said it sees some progress in working with PBMs to adjust reimbursement rate mechanisms and that 80% of its contracts are now locked in for next year.

The company would also benefit if the Federal Trade Commission (FTC) wins its recent lawsuit against the three big PBMs, which could stop the practice of excluding certain drugs from PBM formularies and increase transparency, which would help pharmacy operators.

Even with its recent gains, the stock only trades at a forward price-to-earnings (P/E) ratio of 5.5, which is still very inexpensive and well below historical valuations.

WBA PE Ratio (Forward) data by YCharts

Given the positive impacts the company should see from store closures and the stock's cheap valuation, Walgreens is an intriguing rebound candidate. A positive outcome for the FTC in its lawsuit against PBMs could only further bolster its turnaround potential.

As such, I do not think it is too late for investors to buy the stock.

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