After a terrible 2024 that saw its shares lose more than 60% of their value, 2025 is starting out as a better year for the company. Walgreens Shoe Alliance (Nasdaq: WBA)with the stock rising significantly after the pharmacy operator reported better-than-expected financial results for the first quarter of 2025 for the period ending in November 2024.
Let’s take a look at Walgreens’ most recent quarterly report and its ongoing turnaround efforts to see if it’s too late to buy the stock.
While Walgreens still saw earnings decline during the quarter, results easily beat analysts’ expectations.
Revenue jumped 7.5% year over year to $39.5 billion, after adjustment Earnings per share (EPS) fell 29% to $0.51. That was ahead of analyst consensus of adjusted EPS of $0.37 on revenue of $37.4 billion.
In fact, revenues rose across all sectors. US retail pharmacy sales rose 6.6% year over year Same store sales Jump 8.5%. Comparable pharmacy sales rose 12.7%, with prescription volume up 2.3%. However, comparable retail sales fell 4.6%, dragged down by a slowing cold and flu season and continued weakness in discretionary items.
Once again, Walgreen’s U.S. pharmacy business saw its operating income decline due to pharmacy reimbursement pressures. Adjusted operating income fell 36.4% year over year to $441 million. US retail pharmacy gross margins fell from 18.8% from 17%.
It closed 67 locations this quarter, and the company plans to close about 450 more stores by the end of 2025. Walgreens said its reimbursement contracts are in effect for 2025 and that most have features to reduce reimbursement risk. On the front end, the operation has begun with its initial efforts in inventory management and merchandising, and is expected to ramp up the strategy in the second half. However, management admitted that this had a negative impact on retail sales in the quarter.
International sales rose 6.5% year-on-year, with Boots UK sales up 4.6%. Same store sales at Boots pharmacies rose 10.9%, while retail same store sales increased 8.1%. International adjusted operating income jumped 16.1% year-on-year to $168 million.
US healthcare segment revenues rose 12% year over year to $2.17 billion. The segment’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose to $70 million, a $109 million improvement over last year. This includes revenue from Walgreens clinic partner VillageMD, which increased revenue 9% year-over-year to $1.6 billion, revenue at specialty pharmacy Shields rose 30% to $200 million, and revenue at home care provider CareCentrix rose 16% to $400 million dollar.
The sales process to sell VillageMD is already underway, the company said. It is also evaluating what to do with Summit/CityMD, the urgent care provider that Walgreens helped VillageMD buy.
Walgreens ended the quarter with $8.1 billion in debt and $1.2 billion in cash. It generated negative free cash flow of $424 million in the quarter due to seasonal inventory buildup.
Looking ahead, it maintained its full-year financial guidance for adjusted EPS of $1.40 to $1.80.
Walgreens is still in the early stages of its transformation, but there has been some positive progress. The positive impact of store closures can be seen in the strong results of the stores themselves, while closing loss-making stores would ultimately lead to better profitability.
More importantly, it looks like the company’s 2025 contracts should alleviate some payment pressures. This continues to be one of the biggest areas to watch for the company. There has been some bipartisan support for the federal government to reform the current state of the pharmacy benefit management (PBM) industry, which could be a big boost for Walgreens.
PBMs act as intermediaries to help obtain discounted prices and rebates from drug companies and set the prices that insurance companies pay to pharmacies. However, the three big PBMs that dominate the market are now owned by insurance companies, and have put significant pressure on pharmacies for years, to the point where pharmacies are losing money filling some types of prescriptions, including the popular weight loss drug GLP-1.
From a valuation perspective, Walgreens trades at a forward price-to-earnings (P/E) ratio of 7.7 and an enterprise value to EBITDA multiple of 5. Enterprise value takes into account its net debt. By either measure, the stock looks cheap.
Walgreens remains a speculative stock given the pressure it is under from payments and with companies like Walmart and Amazon It is looking to capitalize on the closure of its stores by offering free same-day prescription delivery. However, between its valuation and turnaround plan, the stock is still worth holding a small position.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeffrey Seller He has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Walmart. The Motley Fool has Disclosure policy.
Walgreens stock rises as shift begins. Is it too late to buy stocks? Originally published by The Motley Fool