Stock Analysis & Ideas

Here’s Why Walgreens Stock Drops 7% Despite Q3 Beat

Story Highlights

Walgreens stock slipped roughly 7% following Q3 results. Sales and earnings declined on a year-over-year basis.

Walgreens Boots Alliance (NASDAQ: WBA) announced better-than-expected Q3 financial numbers. However, its stock closed almost 7% lower on Thursday.

Multiple factors, including the year-over-year decline in sales and earnings, led investors to dump its stock. 

Walgreens’ top line dropped 4.2% year-over-year as benefits from COVID-19 vaccinations continued to diminish. Moreover, management blamed the weakness in AllianceRx Walgreens for the overall decline in sales.

While its revenues slipped, adjusted earnings fell over 30%, reflecting tough comparisons and growth investments. 

Including yesterday’s decline, WBA stock has lost more than one-fourth of its value in 2022.

Now What?

Despite the weakness in Q3, Walgreens reiterated its EPS guidance and expects low-single-digit growth in FY22. Further, Walgreens is effectively managing inflation in wages and cost increases. The company is focusing on lowering costs through its transformational cost management program. 

Besides cost-savings measures, it continues to invest in its fast-growing Walgreens Health business, which is positive. However, the absence of pandemic-led benefits and a challenging operating environment could play spoilsport.

It recently announced the cancellation of its plan to sell the Boots and No7 Beauty Company businesses. Walgreens blamed the current market instability for the lack of financing availability.

In response to its decision, Deutsche Bank analyst George Hill stated, “We suspect WBA is now locked into owning boots in the near to medium term. The lack of an option here limits its flexibility in capital deployment to some extent as the sales of its UK-based business was expected to be a source of funds for other growth initiatives.” 

However, the analyst sees no concerns about Walgreens’ ability to generate free cash flows and cover dividend payments. 

Hill has a Hold recommendation on WBA stock as he believes that the “COVID-19 vaccine benefit already peaked in mid to late 2021, and the pharmacy industry has its long-term challenges posed by payer consolidation and alternative distribution channels.”

Including Hill, eight analysts have a Hold rating on WBA stock. Meanwhile, it has received one Buy and one Sell recommendation. Moreover, the average Walgreens Boots Alliance price target of $47.70 implies 25.9% upside potential.

Bottom Line

Walgreens’ investment in growth and technology, aggressive hiring to accelerate script volume recovery, cost savings, and expansion of healthcare solutions will likely support its growth. However, macro uncertainty and increasing competition pose challenges.

Disclosure

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