Walgreens Boots Alliance 2024 Second Quarter Results

JC Project Freedom Walgreens Boots Alliance

Disclaimer: I do not own this business in my portfolio nor is this a buy or sell recommendation. I am just curious about why the business is doing so badly compared to the last time when I looked at this company.

JC Project Freedom Walgreens Boots Alliance
Walgreens Boots Alliance

Introduction

Walgreens Boots Alliance (Nasdaq: WBA) serves millions of customers and patients daily with over 12,500 locations across the U.S., Europe, and Latin America. WBA has presence in eight countries through its portfolio of consumer brands: Walgreens, Boots, Buane Reade, the No7 Beauty Company, and Benavides in Mexico. WBA has a portfolio of healthcare-focused investments in several countries including China and the U.S.

Change in Industry and Headwinds

WBA and Rite Aide put many smaller and independent pharmacies out of business in the nineties, they were operating strongly then. The operating environment for retail pharmacies has deteriorated in the last decade. The business faces structural challenges. The macro economy is deteriorating. There are rising labour costs, the impact of Pharmacy Benefit Managers lowering drug costs, and increased competition from pharmacy chains and online businesses such as Amazon. These factors are eroding the business’ moat over time.

WBA recently acquired VillageMD and Summit Health, the retailer offers 1-day delivery for most prescriptions, but the company still struggles to compete in today’s challenging operating environment. Over the last 4 years, >40% of people have purchased a prescription online, online businesses are well positioned to capture this change in consumer behaviour to shop for prescriptions online rather than through a traditional retail approach. Rite Aid has declared bankruptcy last year. This tells what WBA’s future may look like shortly. Its retail offerings won’t be able to compete with mega-retailers such as Walmart and Target who also have their pharmacies.

There is labour shortage of pharmacists as fewer people are entering the field, and many in the sector won’t prefer to work in retail stores. This leads to overworking of individuals. This makes running the retail business more challenging than before. FED implied that the rates are going to remain high, and WBA’s $35 billion debt will incur high interest expenses. Couple with weak core pharmacy retail and debt level will adversely impact the weak balance sheet.

Financial

Revenue

Overall, the revenue has increased throughout the years, FY2020 was an outlier due to COVID-19 and many places experienced a sharp drop in retail revenue due to lockdowns. The total revenue has increased from USD 118.21 billion in 2017 to USD 139.08 billion in 2023.

EBIT

There is a clear trend that despite various acquisitions, the EBIT has not improved but has shown decreasing over the years. The EBIT of USD 6.26 billion in 2017 has dropped to an EBIT of USD 2.99 billion in 2023.

Free Cash Flow

We observed a similar trend that Free Cash Flow has decreased from USD 5.9 billion in 2017 to USD 0.14 billion in 2023.

Return on Invested Capital %

WBA’s ROIC has deteriorated over the years since 2017 and it has mainly remained in the negative zone throughout the years. In 2023, we observed further deterioration towards -12.46%.

Debt/Equity Ratio

The rule of thumb for selecting great companies is to have low or moderate debt. In this scenario, the debt-to-equity ratio is more than 1 since 2017 and has drastically increased to 2.57 in FY2023. This is a definite red flag.

Conclusion

The signs are written on the wall that look ominous for Walgreen Boots Alliance. Retail sales continue to disappoint and show weakness. There is a continuous drop in spending for the health and personal care stores. On the flip side, Amazon, Walmart, and Target collectively continue to account for a higher share of all online retail sales than before the pandemic. The online sale is a trend that does not seem to reverse.

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