Walgreens Boots Alliance (WBA) is facing additional market pressures following a downgrade in its outlook by Moody’s Ratings from stable to negative. This downgrade reflects the risks associated with the company’s operational turnaround strategy, amidst challenges from a weaker consumer environment, growing inflation, and legal disputes.
The retail pharmacy giant saw its shares close at $9.70 on Friday, marking a 0.5% dip from the previous trading session. Moody’s, however, maintained Walgreens’ Ba3 corporate family rating and other related ratings. Despite the downgrade, the company continues to grapple with a 22.5% decline in its shares over the past month, falling slightly behind industry and market benchmarks.
Walgreens’ efforts to shrink its footprint have led to increased costs and wider losses, as seen in its first-quarter fiscal 2025 results. CEO Tim Wentworth’s silence on rumors of a potential sale to private equity firm Sycamore Partners has affected investor confidence. Legal challenges, including disputes and lawsuits, have also weighed on the company’s stock performance.
The company’s U.S. Retail business faces pressure from inflation, higher interest rates, and changing consumer behavior. In the first quarter of fiscal 2025, U.S. comparable retail sales declined by 4.6%, with specific factors contributing to this decrease. Walgreens now anticipates a 4%-5% decline in retail comp sales for 2025, compared to previous guidance.
Walgreens has paused its quarterly dividend payouts for the first time in 90 years to strengthen its balance sheet. This decision aims to reduce debt over time and enhance free cash flows, albeit negatively impacting market sentiment. Moody’s outlook projects negative free cash flow for Walgreens despite the dividend suspension and reduced capital spending.
Despite these challenges, Walgreens has seen early promising results from its Footprint Optimization Program, with plans to close 450 stores by the end of 2025. The company aims to streamline its operations, improve performance, and align store locations with changing consumer trends.
In terms of merchandising, Walgreens is expanding its product offerings in key categories and increasing brand penetration. The company leverages omnichannel capabilities to meet consumer preferences and enhance its product assortment. Efforts are expected to intensify in the second half of fiscal 2025.
Walgreens has made progress in improving free cash flows through operational actions and asset monetization activities. The company aims to enhance its financial position, as reflected in its reduced stake in certain ventures and planned debt repayment strategies.
Despite recent challenges and the negative market sentiment, Walgreens remains positioned to overcome obstacles and deliver stronger performance moving forward. Shareholders may consider holding on to WBA stock, while potential investors could wait for a more favorable entry point. Walgreens carries a Zacks Rank #3 (Hold) currently.
In conclusion, Walgreens faces an array of challenges but demonstrates resilience and strategic initiatives to navigate these obstacles. By focusing on operational improvements, financial strength, and customer-centric strategies, Walgreens aims to drive growth and enhance shareholder value in the long term.