Walgreens Stock Skyrockets as Turnaround Begins. Is It Too Late to Buy the Stock?

After a dreadful 2024 that saw its stock lose more than 60% of its value, 2025 has started off as a better year for Walgreens Boots Alliance (NASDAQ: WBA), with the stock skyrocketing after the pharmacy operator announced better-than-expected fiscal Q1 2025 results for the period ended November 2024.

Let's look at Walgreens' most-recent quarterly report and its ongoing turnaround efforts to see whether it's too late to buy the stock.

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Turnaround in progress

While Walgreens still saw profits fall in the quarter, the results easily topped analyst expectations.

Revenue jumped 7.5% year over year to $39.5 billion, while adjusted earnings per share (EPS) sank 29% to $0.51. That was well ahead of the analyst consensus for adjusted EPS of $0.37 on revenue of $37.4 billion.

In fact, revenue rose across all segments. U.S. retail pharmacy sales climbed 6.6% year over year, with same-store sales jumping 8.5%. Comparable pharmacy sales rose 12.7%, with prescription volumes up 2.3%. However, comparable retail sales sank 4.6%, hurt by a slower cold and flu season and continued weakness in discretionary items.

Walgreen's U.S. pharmacy business, once again, saw its operating income sink due to pharmacy reimbursement pressures. Its adjusted operating income dropped 36.4% year over year to $441 million. U.S. retail pharmacy gross margins slid from 18.8% from 17%.

It closed 67 locations in the quarter, and the company has plans to close about another 450 stores by the end of 2025. Walgreens said its contracts for reimbursement are in place for 2025 and that most have features to lessen reimbursement risk. On the front end, the process has begun with its initial inventory management and merchandising efforts, with the strategy expected to ramp up in the second half. However, management admitted this has a negative impact on its retail sales in the quarter.

International sales climbed 6.5% year over year, with Boots UK sales up 4.6%. Boots pharmacy same-store sales climbed 10.9%, while retail same-store sales increased by 8.1%. International adjusted operating income jumped 16.1% year over year to $168 million.

Revenue from the U.S. healthcare segment rose 12% year over year to $2.17 billion. The segment's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) climbed to $70 million, a $109 million improvement from a year ago. This includes Walgreens' clinic partner VillageMD growing revenue by 9% year over year, to $1.6 billion, specialty pharmacy Shields' revenue surging 30% to $200 million, and home-based patient-care provider CareCentrix revenue rising 16% to $400 million.

The company said the sales process to sell VillageMD is already underway. It is also evaluating what to do with Summit/CityMD, the urgent care provider that Walgreens helped VillageMD buy.

Walgreens ended the quarter with $8.1 billion in debt and $1.2 billion in cash. It generated negative free cash flow of $424 million in the quarter due to seasonal inventory buildups.

Looking ahead, it maintained its fiscal full-year guidance for adjusted EPS of $1.40 to $1.80.

Image source: Getty Images

Is it too late to buy the stock?

Walgreens is still in the early stages of its turnaround, but there has been some positive progress. The positive impact of store closures could be seen in its strong same-stores results, while the closure of money-losing stores should eventually lead to better profitability.

Importantly, it looks like the company's contracts for 2025 should lessen some of the reimbursement pressure. This is still one of the biggest areas to watch for the company. There has been some bipartisan support for the federal government to reform the current state of the pharmacy benefit manager (PBM) industry, which could be a big boost to Walgreens.

PBMs act as middlemen to help get discounted pricing and rebates from pharmaceutical companies and set the prices insurance companies pay to pharmacies. However, the three large PBMs that control the market are all now owned by insurance companies, and they have been greatly pressuring pharmacies for years, to the point where pharmacies lose money filling some types of prescriptions, including popular GLP-1 weight loss drugs.

From a valuation perspective, Walgreens trades at a forward price-to-earnings ratio (P/E) of 7.7 and an enterprise value to EBITDA multiple of 5. Enterprise value takes into consideration its net debt. By either metric, the stock looks cheap.

Walgreens remains a speculative stock given the pressure it's seeing from reimbursement and with companies like Walmart and Amazon looking to take advantage of its store closures by offering free same-day prescription deliveries. However, between its valuation and turnaround plan, the stock continues to be worth holding a small position.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Walmart. The Motley Fool has a disclosure policy.