Walgreens Boots Alliance(NASDAQ: WBA) is in the midst of a significant turnaround. New CEO Tim Wentworth is trying to improve the company's financials and make the stock a much more appealing option for long-term investors. It won't be easy amid rising costs and heightened competition.
By becoming leaner and shedding unprofitable stores, Walgreens can hopefully make strides in getting back to breakeven and being in a better position to consistently post profits. Wentworth recently announced the company will close approximately 1,200 stores over the next few years. Today, it has around 8,500 locations in the U.S.
However, there are still many levers Wentworth can pull on to improve the company's operations, and investors shouldn't be surprised if there are more big moves to come.
Walgreens' financials need a lot of work
A key percentage investors should pay attention to Walgreens' operating margin. This represents its operating profit/loss as a percentage of revenue, and it's higher up the income statement than net income, which means it excludes a lot of the noise that can often skew earnings, making it a better indicator of how the business is doing from its day-to-day operations.
WBA Operating Margin (Quarterly) data by YCharts
What's concerning is that over the past five years, the highest that Walgreens' operating margin has been is just 3.5%. And oftentimes, it has been negative. With such poor margins, it's no surprise that the company slashed its dividend earlier this year and is going to close a significant number of locations.
For investors to feel comfortable with buying shares of the business, they'll want to see some more profitability on a consistent basis. And by looking at the chart above, it's clear that won't be an easy fix. Focusing on just its more profitable locations will help move the needle, but I'm not sure that will be enough to fix the problem.
Walgreens is considering other options
Wentworth is considering other significant measures that could help Walgreens trim costs even further. In recent years, the company has been expanding into healthcare with the launch of primary care clinics at its locations. In theory, the idea sounds good as it could help bring in more foot traffic and potentially lead to more revenue. But getting into healthcare isn't cheap, and that couldn't be any more obvious with low-cost leader Walmartabandoning its plans for offering healthcare services.
It's a path that Walgreens may be on as well. The company is looking at selling its specialty pharmacy business, Shields Health. And Walgreens is even considering selling its entire stake in VillageMD, the primary care company that was supposed to be a key part of its growth strategy in healthcare. Walgreens has already closed some underperforming clinics and more closures could be coming.
It wouldn't look great for Walgreens to make a big pivot from this strategy but with a new CEO at the helm who doesn't have connections to the ambitious healthcare endeavor, it's one of the bigger moves Wentworth could make to help bring down costs and simplify Walgreens' business.
Is Walgreens stock worth buying today?
There are many moves Walgreens can take to improve its results, which is why there is potential for the healthcare stock to be a good contrarian play. But investors shouldn't underestimate the risk.
Turnaround efforts often fail, and with Walgreens facing rising competition from Walmart and even Amazon expanding its pharmacy services, simply reducing its store count and cutting costs isn't going to be a surefire strategy for making Walgreens a better overall investment. The company needs to prove to investors it can not only compete against these behemoths in the long run but also generate strong results and grow its operations.
That isn't evident today, and until that changes, investors are going to be better off steering clear of what's still a highly risky stock in Walgreens.
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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. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Walmart. The Motley Fool has a disclosure policy.
