Walgreens Boots Alliance Inc. (WBA, Financial) offers good value for money following its 29% decline over the past year.
The drugstore chain is closing its unprofitable stores, investing in international growth opportunities and working to become more efficient.
Refreshed strategy
The company is making changes to its stores to improve their performance. For example, in the first quarter of 2020, the retailer continued to test out a smaller store model. Walgreens said it now has 23 smaller stores that are resonating with customers.
It also completed 114 of its 200 planned Walgreens store closures, and 28 of its 200 Boots U.K. store closures in the first quarter. The store closures could improve its financial performance, as the majority delivered disappointing levels of profitability in fiscal 2019.
The business reported positive results from its partnership with grocery store chain Kroger (KR, Financial) in the first quarter. The two companies formed a procurement alliance in December that will combine their purchases of private label goods. This could reduce Walgreens’ costs due to it being able to negotiate better terms on a combined larger volume of goods than if it purchased them independently.
International opportunities
The retailer is also investing in international growth opportunities. For example, it introduced enhanced beauty areas in 26 of its Boots U.K. stores in the first quarter. In the first-quarter earnings report, Walgreens said the products have resonated with customers and were a factor in improving its sales performance.
In addition, Walgreens has signed an exclusive agreement with children’s brand Mothercare to sell its products in its stores. This could broaden the retailer’s appeal to a wider range of consumers and attract new customers to its stores who may not have previously visited them.
The drugstore chain also rolled out its new pharmacy operating system to over 1,400 Boots U.K. stores in the first quarter. The system reduces the amount of time the company’s pharmacists spend on administrative duties, enabling them to spend more time with customers. This could improve the customer experience and help to differentiate the business from its competitors.
Potential problems
Walgreens reported a disappointing financial performance for its first quarter. Adjusted earnings per share declined 5.7% to $1.37 compared to the prior-year quarter. This was due to weaker margins in its U.S. business and a challenging retail environment in the U.K. These trends could continue over the near term and may hurt investor sentiment.
In response, the retailer is seeking to become more efficient. It raised its annual cost savings target to in excess of $1.8 billion by fiscal 2022. It plans to achieve this goal through a refreshed spending program that focuses on investments to gradually reduce costs over the long run. For example, it is replacing the existing lighting across its stores with LED lights. This is not only cheaper to run than its existing lighting system, but offers an improved product display that could enhance the shopping experience of its customers.
In addition, Walgreens Boots Alliance is reviewing all of its investment plans in the U.K. This could lead to it being a leaner and more efficient business that is better able to compete in a highly competitive retail market.
Outlook
Market analysts project the company will produce a 3.4% increase in earnings per share in fiscal 2021. Its forward price-earnings ratio of 9 suggests that it offers good value for money as it implements its revised strategy.
Disclosure: The author has no position in any stocks mentioned.
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