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Robert Stephens, CFA
Robert Stephens, CFA
Articles (238) 

Why Walgreens Boots Alliance Has Investment Potential

The company could deliver a successful turnaround

June 17, 2019 | About:

Continued investments in international markets and in improving the customer experience could lead to a stock price recovery for Walgreens Boots Alliance Inc. (NASDAQ:WBA). The retail pharmacy chain is seeking to differentiate itself from peers, while aiming to make its various business units increasingly efficient.

It is also conducting a reorganization to streamline the business in order to boost its overall strategy.

Having fallen 18% in the last year, the stock trades with a low valuation and seems to offer recovery potential.

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Reorganization

The company is making a number of changes to its organizational structure that could enhance its competitive position. For example, it has reorganized its senior leadership team to create a clearer delineation between development and delivery.

Walgreens has also created a dedicated accountable team within its pharmacy segment that will drive volume growth through new and existing partnerships. This will allow the remainder of its team to focus on operational effectiveness. In the retail segment, the company is pivoting toward core countries and brands where it believes the highest return on investment will be achieved.

Customer focus

The company’s investments in optimizing its stores could lead to higher levels of customer loyalty. Its Rite Aid store optimization program has delivered favorable retention rates that allow it to focus volume on fewer local stores without reducing geographic coverage. It will then increase the scope of the program from 600 stores to 750 stores. Alongside this, a comprehensive review is underway of Walgreens’ store network to address underperforming locations. As part of this initiative, a small-store format is being tested that is expected to be built out over the medium term.

Further investments in its digital operations could enhance the customer experience. With 86 million active Balance Reward members, there is scope for significant cross-selling opportunities, with greater personalization and unique offers having the potential to increase customer engagement.

International growth

Investments in international markets such as the U.K. and China could enhance the financial outlook of the business. For example, in collaboration with Chinese drugstore Guoda, Walgreens opened its first pilot pharmacy in Shanghai that combines traditional Chinese medicine and skincare with well-known international brands.

It has also refitted 24 beauty halls in the U.K. in the last two months, introducing Boots Beauty Specialists. The stores have an in-depth knowledge of a wide range of brands and categories, and could improve customer service levels to increase differentiation versus peers.

Threats

Walgreens' recent performance has been disappointing. In the most recent quarter, the company reported a 4.3% decline in earnings per share on a constant currency basis. This was below guidance, with low volumes and continued reimbursement pressure negatively affecting the wider industry being key reasons for the decline. This has caused the company to lower its guidance for the current fiscal year. Since reimbursement pressure and lower volumes could continue in the short run, there is a risk that further downgrades to its financial outlook take place. This may lead to weaker investor sentiment.

In response to challenging operating conditions, Walgreens has increased its annual cost savings target to at least $1.5 billion from the previous figure of $1 billion. As part of this strategy, it has implemented store closures in Chile and Mexico, while launching an optimization initiative in its pharmaceutical wholesale division. In the most recent quarter, it also announced a 20% reduction in the Boots U.K. central workforce that is expected to be completed by the end of the current fiscal year.

Outlook

In the next fiscal year, the company is projected to record a 1% increase in earnings per share. While the growth is disappointing, the forward price-earnings ratio of 8.8 suggests it offers a wide margin of safety.

Although challenging operating conditions may persist in the short run, a focus on improving its offering in international markets could enhance its competitive position.

Likewise, a reorganization may improve its efficiency, while increased investments in the customer experience could differentiate it from peers.

Having underperformed the S&P 500 by 22% in the last year, the stock’s valuation suggests it offers long-term recovery potential.

Disclosure: The author has no positions in any stocks mentioned.

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