Critical Overhaul And Digital Investments Set To Revitalize Profitability And Market Share

Key Takeaways

• Strategic optimizations and focusing on profitable stores alongside digital expansion are aimed at boosting profitability and customer loyalty.
  
• Efforts in health and wellness differentiation and strategic alignments with pharmacy services are designed to increase market share and stabilize pharmacy margins.
  
• Challenges in consumer environment, pharmacy trends, and regulatory pressures, alongside strategic store closures, pose risks to revenue and net margins.

Catalysts

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

• The strategic review and operational optimizations, including a focus on closing underperforming stores and optimizing the store footprint, are aimed at enhancing profitability and operational efficiency, likely impacting net margins positively.
  
• Investments in digital and omnichannel offerings to meet customer demands are expected to drive customer loyalty and improve revenue streams through increased traffic both online and in physical stores.
  
• Enhancing the customer and patient experience across key areas, with a focus on health and wellness, is anticipated to differentiate Walgreens in the competitive marketplace, potentially increasing its market share and impacting revenue growth.
  
• Active discussions with PBM and payer partners to align incentives and ensure fair payment for pharmacy services indicate efforts to stabilize and potentially improve pharmacy margin pressures, impacting net margins.
  
• Restructuring operations around strategic decisions, such as streamlining the organization and making investment decisions based on strategic fit and profit growth potential, suggests a focus on cost management and operational efficiency, which could lead to improved net margins and earnings.

Assumptions

• Analysts are assuming Walgreens Boots Alliance's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -4.0% today to 0.8% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $1.24) by about August 2027, up from $-5.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.6 billion in earnings, and the most bearish expecting $694 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.9x on those 2027 earnings, up from -1.6x today. This future PE is lower than the current PE for the US Consumer Retailing industry at 20.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 10.25%, as per the Simply Wall St company report.

Risks

• The current operating environment poses challenges, including a worse-than-expected consumer environment and challenging pharmacy industry trends, which can negatively impact revenue and net margins.
  
• Increased regulatory and reimbursement pressures, such as fluctuations in NADAC pricing, could adversely affect pricing dynamics and pharmacy margins.
  
• A slowdown in script market growth, remaining below pre-pandemic levels, could hamper revenue growth and profitability in the pharmacy segment.
  
• Investments in targeted promotions and price decisions to drive traffic and customer loyalty might weigh on near-term profitability due to reduced margins in the retail segment.
  
• The strategic review and potential closure of underperforming stores, while intended to improve profitability and customer experience, carry execution risks that could impact short-term financial performance and net margins.

Valuation

• The analysts have a consensus price target of $13.62 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 $23.0, 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 2027, revenues will be $150.9 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 10.3%.
  
• Given the current share price of $10.78, the analyst's price target of $13.62 is 20.8% 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.