Walgreens Stock Surges as Cost-Cutting Measures Boost Stock

15 Okt

Walgreens Boots Alliance (NASDAQ: WBA) saw its stock surge by more than 13% after announcing a major cost-cutting initiative, including the closure of 1,200 underperforming stores by 2027. The company’s fiscal fourth-quarter earnings exceeded Wall Street's expectations, which, along with these aggressive restructuring measures, contributed to investor optimism and the stock's sharp rise. This marks a significant turnaround for a company that has faced ongoing challenges in recent years, from declining pharmacy reimbursement rates to softer consumer spending and a bumpy transition into primary care.

Earnings Overview
Walgreens' fiscal fourth-quarter performance showed resilience amid a challenging environment. The company reported revenue of $37.55 billion, surpassing the analyst expectation of $35.76 billion, representing a 6% year-over-year increase. Adjusted earnings per share came in at 39 cents, exceeding the projected 36 cents. However, the company did report a net loss of $3 billion due to a valuation allowance, largely related to opioid settlement charges, which contrasts sharply with a loss of $180 million in the same period last year.

The retail giant is navigating a "rocky fiscal 2024" with pressures from falling reimbursement rates and higher operational costs. To address these challenges, Walgreens has undertaken extensive cost-cutting efforts, including store closures, workforce reductions, and the integration of artificial intelligence to optimize its supply chain. The company successfully cut $1 billion in costs during the fiscal year, a substantial achievement that bolstered its U.S. retail pharmacy segment, according to CFO Manmohan Mahajan. These efforts helped Walgreens maintain steady growth across its key business segments, including a notable 7.1% year-over-year rise in U.S. healthcare revenue to $2.11 billion, partly driven by growth in its specialty pharmacy and primary care businesses.

The decision to close 1,200 underperforming stores will further support the company’s financial health. Walgreens CEO Tim Wentworth noted that the closures will result in a healthier store base and will improve free cash flow while helping the company adapt to shifting consumer behavior. With 8,700 U.S. locations, 25% of which are unprofitable, the move to streamline operations is expected to be "immediately accretive" to adjusted earnings.

Additionally, Walgreens (NASDAQ: WBA) reported growth in its international unit, which posted sales of $5.97 billion, a 3.2% year-over-year increase, beating analyst expectations of $5.81 billion. The company’s U.K.-based drugstore chain, Boots, played a key role in this growth, with sales increasing by 2.3%. Walgreens’ U.S. retail pharmacy sales also rose by 6.5% to $29.47 billion, a reflection of higher prescription drug prices and continued demand despite falling margins from reimbursement rate pressures.

Technical Analysis
From a technical standpoint, Walgreens’ stock is showing strong signs of recovery after a prolonged bearish trend. The stock is up 9.22% at the time of writing, and the relative strength index (RSI) has climbed to 62.48, indicating healthy momentum without yet crossing into overbought territory. For nearly a year, Walgreens (NASDAQ: WBA) has been trading in a wedge pattern, characterized by lower highs and lower lows, reflecting its struggles in the market. However, recent news and the surge in stock price have propelled WBA to break above the upper trendline of this wedge, signaling a potential reversal.

The regression analysis further supports this bullish outlook, showing that Walgreens (NASDAQ: WBA) is breaking out of its prolonged downtrend. The breakout is accompanied by a notable increase in trading volume, suggesting that the market has responded positively to the news of store closures and better-than-expected earnings. The next key level to watch is the stock's previous resistance zone, which, if breached, could lead to a more sustained upward movement.

Outlook
Walgreens (NASDAQ: WBA) is clearly undergoing a transformative period, with significant restructuring efforts aimed at streamlining operations and boosting profitability. Despite facing ongoing pressures from a challenging retail environment and falling pharmacy margins, the company’s aggressive cost-cutting, particularly the closure of 1,200 stores, is expected to be a major driver of future earnings growth. Its revenue growth, especially in the U.S. healthcare and international segments, provides further optimism for investors.

While the company faces considerable challenges in the years ahead, its commitment to refocusing on profitability, combined with strategic initiatives like AI-driven supply chain optimizations and improved pharmacy benefit manager (PBM) negotiations, indicate that Walgreens is positioning itself for a stronger future. The stock's technical breakout from its long-term bearish pattern offers a compelling opportunity for investors looking for a turnaround play in the retail pharmacy sector.

If Walgreens (NASDAQ: WBA) can continue this upward momentum and effectively navigate its cost-cutting initiatives, WBA could see more sustained gains in the months ahead. Investors should keep an eye on upcoming earnings reports and management's progress on its store closure plan to gauge the long-term viability of this recovery.