Operational Optimizations Will Drive Future Profitability In Retail And Pharmacy

Key Takeaways

• Store optimization and labor management improvements are expected to enhance net margins by reducing costs and increase customer satisfaction.
  
• Increasing pharmacy efficiency and expanding product lines aim to boost revenues and safeguard against reimbursement pressures, enhancing gross margins.
  
• Persistent retail challenges, reimbursement pressures, and litigation costs threaten profitability and financial flexibility, impacting margins, cash flow, and shareholder returns.

Catalysts

Operates as a healthcare, pharmacy, and retail company in the United States, Germany, the United Kingdom, and internationally.

• Walgreens Boots Alliance is optimizing its store footprint by closing underperforming locations. This is expected to lead to a healthier and more profitable store network, positively impacting net margins and reducing costs over time.
  
• The company is improving labor management through scheduling optimization, which is aimed at enhancing in-store experiences and increasing operational efficiency. This is likely to improve net margins by reducing labor costs and increasing customer satisfaction.
  
• Walgreens is enhancing its pharmacy operations by utilizing micro fulfillment centers. These centers have increased shipping efficiency and reduced costs per prescription, which can lead to improved net margins and expanded pharmacy revenues.
  
• The company has restructured its reimbursement model through negotiations with payers, adjusting contract terms to reflect fairer compensation for services. This initiative may stabilize and potentially improve future earnings and safeguard against reimbursement pressures.
  
• Walgreens is innovating its consumer retail business by introducing new product categories and expanding own brand products. These initiatives are expected to drive revenue growth by increasing market share in health and wellness-related categories and improving gross margins through higher-margin private label sales.

Walgreens Boots Alliance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Walgreens Boots Alliance's revenue will grow by 1.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -5.9% today to 0.2% in 3 years time.
• Analysts expect earnings to reach $282.6 million (and earnings per share of $0.37) by about January 2028, up from $-8.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $474.4 million in earnings, and the most bearish expecting $106 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 45.4x on those 2028 earnings, up from -1.1x today. This future PE is greater than the current PE for the US Consumer Retailing industry at 27.1x.
• Analysts expect the number of shares outstanding to decline by 3.7% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.24%, as per the Simply Wall St company report.

Walgreens Boots Alliance Future Earnings Per Share Growth

Risks

• The U.S. retail segment is facing persistent challenges due to weakened consumer discretionary spending, accumulated inflation, and higher interest rates, which may continue to impact revenue.
  
• Front-end retail business weakness and the impact of the Footprint Optimization Program suggest that there could be ongoing risks to retail sales performance, affecting overall net margins.
  
• The company must navigate complicated contract negotiations to align reimbursement with costs, but continued reimbursement pressure could affect profitability if not managed well.
  
• Seasonal impacts, such as reduced respiratory incidences, have affected sales, highlighting the risk of external factors on earnings.
  
• Legal and opioid litigation payments, along with high net debt, exert pressure on cash flow and financial flexibility, potentially affecting shareholder returns through dividends and stock buybacks.

Valuation

• The analysts have a consensus price target of $12.41 for Walgreens Boots Alliance based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $7.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $159.1 billion, earnings will come to $282.6 million, and it would be trading on a PE ratio of 45.4x, assuming you use a discount rate of 10.2%.
• Given the current share price of $10.89, the analyst's price target of $12.41 is 12.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.