Walgreens Boots Alliance WBA, already dealing with a range of challenges, is set to face further market pressures after Moody’s Ratings downgraded its outlook from stable to negative last Friday. The downgrade highlights significant risks tied to the company’s multi-year operational turnaround strategy. The shift comes as the company continues to face a weaker consumer environment, growing inflation and reimbursement rate pressures, along with challenges from legal disputes and dark rent from its planned store closures.
Following the news, WBA shares closed at $9.70 on Friday, which marked a 0.5% dip from the previous trading session. Meanwhile, the agency has maintained Walgreens’ Ba3 corporate family rating, the Ba3-PD probability of default rating, its senior unsecured notes ratings at B1 and the B1 senior unsecured notes rating issued at Walgreen Co. Additionally, WBA's backed commercial paper program rating was affirmed at Not Prime, while its SGL-2 speculative grade liquidity rating remains unchanged.
WBA Stock Price Performance
The retail pharmacy giant has struggled over the past month, with shares falling 22.5%, slightly trailing the industry’s 22% decline. The stock’s performance also lagged behind the broader sector and the S&P 500 composite’s gains of 6.3% and 1.8%, respectively.
WBA One-month Price Performance
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Walgreens’ actions to shrink its footprint have resulted in higher costs and wider losses in the first-quarter fiscal 2025 results released last month. CEO Tim Wentworth did not address the rumors of a potential sale to private equity firm Sycamore Partners, dampening investors’ enthusiasm. On top of that, ongoing legal proceedings, including arbitration and other claims, have weighed on the stock’s performance.
Here's a brief look.
Factors Influencing WBA Stock Price Slump
Weak Retail Sales, Store Closure Impact: Walgreens’ U.S. Retail business is facing pressure from persistent inflation and higher interest rates, leading customers to cut back on discretionary spending and change their shopping behavior. In the first quarter of fiscal 2025, U.S. comparable retail sales declined 4.6%, with a softer-than-expected cough, cold and flu season contributing nearly 270 basis points (bps) to the overall decrease.
Based on the revised outlook, Walgreens now expects approximately a 4%-5% decline in retail comp sales for 2025 compared to the previous 2%-3% guidance. Meanwhile, the operating loss in the quarter surged to $245 million from $39 million in the year-ago quarter, mainly from higher costs related to the Footprint Optimization Program and lower U.S. retail sales. This led to a loss of 31 cents per share compared with a loss of 8 cents in the first quarter of fiscal 2024.
Mounting Legal Challenges: Right after Walgreens’ Q1 fiscal 2025 results, the U.S. Department of Justice filed a nationwide lawsuit accusing the company of dispensing millions of unlawful opioid prescriptions since August 2012 and seeking reimbursement from federal health care programs. If found liable, the company could face civil penalties of up to $80,850 per violation of the Controlled Substances Act, along with treble damages and penalties for each improperly reimbursed prescription under the False Claims Act.
Additionally, Walgreens is ordered to pay a $987 arbitration award to telemedicine provider PWNHealth in a contract dispute over a COVID-19 test case. The company is also facing a class-action securities lawsuit filed on behalf of stockholders affected by securities fraud between April 2, 2020, and Jan. 16, 2025.
Dividend Pause: For the first time in 90 years, Walgreens has suspended the quarterly cash dividend payouts to focus on a stronger balance sheet. The decision, announced in late January 2025, is part of the company’s broader turnaround efforts to reduce debt over time and improve free cash flows. Walgreens weighed on its future financial obligations, including litigation expenses and debt refinancing, before making this move. However, the market sentiment was negative, especially since days earlier, CVS Health CVS upheld its quarterly dividend of $0.665 per share, reinforcing its commitment to shareholder returns. Adding to the concerns, Moody’s still expects Walgreens to generate negative free cash flow over the next 12 months despite the dividend halt and reduced capital spending.
WBA’s Technical Indicators
Walgreens shares are currently trading below the 50-day SMA (Simple Moving Average), suggesting some near-term weakness. Nevertheless, the stock remains marginally above the 90-day SMA.
WBA Moving Averages
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Positives for Walgreens
Progress in the Footprint Optimization Program: Walgreens’ footprint optimization program is showing promising early results, with prescription retention rates surpassing historical trends. The initiative aims to help realign the company’s store locations with evolving demographic trends and changing consumer preferences. The WBA team has already planned the next 450 store closures (approximate) by the end of 2025, projecting a $100 million benefit in adjusted operating income (AOI). Sale proceeds from owned locations and working capital benefits are expected to significantly exceed closure costs.
On the January 2025 earnings call, management stated that the comparable front-end sales in the retained store fleet are up by approximately 250 basis points (bps) than those stated for closure, while comparable pharmacy scripts are nearly 390 bps higher. The company expects its streamlined footprint to drive stronger future performance.
Refreshed Merchandising Strategy: As part of its health and well-being-focused growth strategy, Walgreens is expanding its product offerings in key categories such as women's wellness, superfoods and sports nutrition. The company also continues to pursue its brand penetration, which rose 75 bps to 17.8% in the fiscal 2025 first quarter. This year, Walgreens aims to introduce about 300 new own-brand products, with around 60 already launched in the first quarter.
Walgreens leverages its omnichannel capabilities to meet evolving consumer preferences, including virtual care, now available to nearly 90% of the U.S. population across 30 states. Additionally, the company has provided same-day prescription delivery nationwide for more than three years, with two-hour delivery from approximately 800 stores. Merchandising efforts are expected to ramp up in the second half of fiscal 2025.
Improving Free Cash Flows: At the end of the first quarter of fiscal 2025, Walgreens delivered a $363 million improvement in its free cash flows compared to the prior-year period, primarily driven by decreased capital expenditures and higher AOI.The company aims to improve its cash flows and net debt position through a mix of operational actions and asset monetization activities. Recently, Walgreens generated nearly $265 million by selling 1.3 million remaining shares of Cencora pledged under the early settled contracts and an additional $50 million in share repurchases.
In the first quarter of fiscal 2025, the company also reduced its stake in BrightSpring to nearly 12%, raising approximately $129 million.Additionally, Walgreens is in the process of selling its Village Medical business within VillageMD, with proceeds intended to pay down debt and make its balance sheet strong.
WBA Stock Valuation
At a forward price-to-sales (P/S) ratio of 0.06, Walgreens stock is close to the industry average of 0.05 but below the five-year median of 0.22. Currently, it has a Value Score of A.
P/S Forward Twelve Months (F12M)
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WBA is also valued cheaper in comparison to industry peer Herbalife Ltd. HLF, which has a P/S of 0.11 at present.
Final Verdict on WBA
Moody’s recent downgrade for Walgreens reflects a cautious stance as the company continues to execute strategic actions amid operational challenges. Yet, the initial round of store closures has outperformed expectations, particularly in script retention, with Walgreens anticipating stronger future performance with a smaller and healthier footprint. Additionally, it is building a customer-centric product assortment with a strong emphasis on owned brand penetration. Current shareholders may want to hold on to WBA stock for now. However, potential investors could wait for a more favorable entry point.
Walgreens carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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