It's been a rough year for retail pharmacy giant Walgreens Boots Alliance (NASDAQ: WBA). The business has struggled to grow and stay out of the red. In the long run, there may be even greater uncertainty, as the viability of its business is questionable, given the rising popularity of e-commerce and online prescription delivery. This year, the stock is down close to 60%.
But recently, it reported its latest earnings numbers, and investors saw some reason for optimism. As a result, the stock had its best day in years. Could Walgreens finally be on the right path, and is the stock overdue for a much larger rally in the weeks and months ahead?
Walgreens announces plan to close 1,200 stores
The big news for Walgreens was that it announced it would be closing 1,200 stores. The company says that of its more than 8,000 stores, around 6,000 are profitable. In an effort to improve its free cash flow and earnings, Walgreens previously stated that it would be looking at shutting down some locations. These store closures will take place over the next three years.
It was news of the store closures that gave investors some hope for improved earnings results, leading to the stock surging more than 15% in just a single day -- its best one-day performance in 16 years.
As for the actual earnings report itself, it remained underwhelming. For the period ending Aug. 31, Walgreens incurred an operating loss of $978 million. And while that included $332 million in goodwill impairment, even without the one-time charge the business would still have been unprofitable.
The company desperately needs to cut costs, and shutting down a significant chunk of its stores can certainly help.
There could be even more changes ahead for the business
Walgreens' CEO Tim Wentworth has been on the job for just over a year now, and he's cut the dividend and has been looking at ways to turn the struggling business around. Reducing the store count wasn't a big surprise, as that has been on his radar for a while.
Investors also shouldn't be surprised if there are more changes to come. Management is considering selling assets, such as its specialty pharmacy business Shields Health, which could give Walgreens $4 billion in cash. It's also looking at reducing its stake in primary care provider VillageMD. I wouldn't be surprised if the company also decides to eliminate its dividend entirely. While it has been a key reason investors have bought shares of Walgreens for decades, suspending the payout may be a necessary move to help free up resources.
Over the past 12 months, Walgreens' free cash flow totaled just $23 million, which is down from $665 million in the previous fiscal year.
Should you buy Walgreens stock?
Shares of Walgreens jumped on news of the planned store closures, but that's not enough of a reason to expect that a much larger rally is in the cards for the healthcare stock. The company still has a lot to do before it becomes a tenable investment option for most investors. Profitability remains a big question mark, especially in the future, as tech giant Amazon plans to offer same-day delivery for prescriptions in more markets, which could hurt Walgreens' business and overall competitiveness.
Over the past five years, Walgreens' stock is still down more than 80%. The company's new CEO is in the early stages of trying to turn the business around, and it's far too early to tell if he will be successful. Unless you have an extremely high risk tolerance, you'll probably be better off taking a wait-and-see approach with Walgreens stock, as this recent rally may be short-lived if the business can't prove that it is on a much better path forward.
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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. The Motley Fool has a disclosure policy.
