Walgreens Earnings Preview: The New CEO Has His Fingers Full

Walgreens (NASDAQ:WBA) previously the premier retail drug retailer operator from the final 20 years of the twentieth century (i.e. Nineteen Eighties and Nineties) experiences their fiscal Q1 ’24 monetary outcomes earlier than the opening bell on Thursday, January 4th, 2024.

Analyst consensus is anticipating $0.63-0.64 per share in EPS, whereas income and working earnings are anticipated at $34.8 billion and $672 million, respectively.

• Anticipated yoy EPS progress: -36%
• Anticipated yoy rev progress: +4%
• Anticipated yoy op earnings progress: -34%

The brand new CEO, Tim Wentworth, has already began changing key executives, which is a plus, however Thursday’s earnings launch and convention name shall be his first runway stroll in entrance of the analysts on a convention name, so it’s onerous to not suppose that the Q2 ’24 steering shall be “kitchen-sinked” (worst-case steering) and financial ’24 steering shall be very conservative.

Present fiscal Q2 ’24 (Feb ’24 qtr) expectations as of at present:

• Anticipated yoy EPS: $0.97 for -16% yoy progress;
• Anticipated yoy working earnings: $1.02 bl for -16% yoy progress;
• Anticipated yoy income: $35.8 bl for 3% yoy progress;

Present fiscal ’24 consensus estimates (ends Aug ’24 full-year):

• Anticipated full-year EPS: $3.33 for -17% yoy decline;
• Anticipated full-year working earnings: $3.4 billion for a -13% decline;
• Anticipated full-year income: $143 billion for yoy progress of +3%

This earnings preview actually doesn’t require or warrant a Warfare and Peace write-up, so I’ll do my greatest to summarize what I feel are the issues dealing with Tim Wentworth and the Walgreens Board:

• Whereas Roz Brewer has and can take numerous flak for her quick CEO tenure and her seemingly lack of any clear path for Walgreens future, the actual fact is Stefano Pessina, the European CEO and present govt chairman, is absolutely responsible for this mess, increasing into Europe and Boots Alliance. Since he took over, WBA has been on a downward trajectory;
• Does Walgreens revert again to its US roots and shed the Boots Alliance enterprise, and in the event that they do, what’s that enterprise price post-Covid? What can WBA get for Boots at present?
• The essential reality for Walgreens and Tim Wentworth is that WBA continues to be producing optimistic income progress yoy, however margins and money circulation have been completely horrid;
• WBA’s hardest two compares to fiscal ’23 are the primary two quarters of fiscal ’24, that are the quarters to be reported tomorrow morning after which February ’24;
• Money circulation and free money circulation (on a trailing-twelve-month (TTM) foundation) have dwindled right down to $0 (that’s not a typo) after WBA averaged throughout the decade from 2010 to 2019, $6 to $8 bl in TTM money circulation, and $2-3 billion in free money circulation (additionally TTM).
• The dividend yield of seven% is a obtrusive purple flag and with the money circulation points, it’s onerous to not suppose and the Board don’t minimize the dividend (not less than in half) or get rid of it altogether and try to protect money for the retail drug retailer large;
• Moody’s has minimize the senior unsecured credit standing of WBA to beneath funding grade (Baa2) whereas Commonplace & Poor’s and Fitch nonetheless charge Walgreens on the low finish of the investment-grade spectrum;
• To indicate readers how money circulation has impacted WBA’s capital allocation, within the final 17 quarters (virtually 5 years) WBA has solely repurchased inventory one quarter, and that was a one-time $1.9 billion allocation within the Feb ’22 quarter;
• The beneath funding grade limits WBA’s financing flexibility (clearly) which can drive the brand new CEO to shed belongings rapidly (possibly not at one of the best costs) to lift capital and never should difficulty debt with the poor credit score rankings;

Again within the mid-Nineties, I learn an article about company turnaround and the three important parts of a turnaround that ought to be in place, after a brand new CEO is called, that give that turnaround the chance of some success:

1.) The enterprise mannequin is undamaged;

2.) Money circulation continues to be optimistic (that’s a difficulty for WBA proper now) whereas income continues to be rising yoy;

3.) The model continues to be viable;

You would add a attainable 4th factor of “capital structure” and the flexibility to make use of the stability sheet to finance no matter’s wanted to be executed by new administration, and that’s somewhat little bit of a difficulty proper now for WBA, significantly given money circulation.

By the way in which, none of this can be a remark or reflection on the Walgreens pharmaceutical or retailer employees. I nonetheless use WBA for scrips and annual flu photographs, and the pharmacists and employees are great and customer-oriented, and so they put in lengthy hours on the job. I nonetheless store in Walgreens shops for comfort gadgets and different gadgets, and the shop employees is all the time useful.

Abstract / conclusion: As an analyst first, and a portfolio supervisor 2nd, the present place of WBA, buying and selling at 6x-7x EPS for 2 consecutive anticipated years (‘fiscal ’23 and ’24) of damaging EPS “growth” of -15% to -20%, with no money circulation or free money circulation, a below-investment grade credit standing (split-rated to be truthful), and a price-to-sales ratio of beneath 0.20x, buyers ought to be very afraid. That price-to-sales ratio is harking back to Kmart, Sears Holdings, Mattress, Tub and Past and some different retail failures, and that’s not a plus.

All this being mentioned, if Tim Wentworth can shed belongings at affordable costs, restore money circulation and free money circulation and stave off the erosion within the retail drug retailer enterprise (not less than partially), it’d insure WBA’s subsequent large factor. But it surely looks like Tim and the Board should be ready of a “forced seller” and that’s by no means good when administration is attempting to maximise gross sales worth. Consumers should know WBA shall be a compelled liquidator (if that’s a part of the technique) so how strong will the bids be, and what worth is there to the ancillary elements of WBA’s enterprise?

I’ll be an avid reader of the convention name notes and any analysis on WBA after Tim’s first take with the sell-side consensus.

It looks like the brand new CEO and Board have to lift capital in a rush, and that’s by no means a superb place to be in.

Technically, a commerce again beneath $19-20 on heavy quantity, or the late November ’23 low – could be the worth stage to rethink an extended place. (No positions are presently owned. Not too long ago offered a small place owned after Tim Wentworth was named CEO.)

Turnarounds can work – take a look at GE (and even GE is a piece in progress) – however you’d should suppose turnarounds are exceptionally powerful in brick-and-mortar retail, as historical past tells us.

(In June ’23, this weblog put a promote on the inventory with an earnings preview written for Searching for Alpha here.)

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Editor’s Notice: The abstract bullets for this text had been chosen by Searching for Alpha editors.