Walgreens Boots Alliance (NASDAQ: WBA) is a stock that's in deep trouble. Its future is uncertain, the business isn't performing well, and investors have all but abandoned it. Despite trading at a significantly reduced valuation and at prices not seen in multiple decades, there isn't overwhelming interest from investors to take a chance on this struggling stock.
There are, however, many things Walgreens can do and many levers it can pull to try and turn its operations around. Here's what investors should keep an eye out for because these could be signs that the company is being more aggressive in its turnaround plan, and that could set it on a better path forward.
1. Suspend the dividend
Walgreens isn't a very attractive dividend play these days. While its yield is up to over 9% right now, many investors likely wouldn't trust the safety of its dividend given the uncertainty the business faces. Walgreens, for example, has incurred a net loss in three of its past four quarters and there could be more pain ahead for the company as it navigates a growth strategy related to healthcare and tries to cut costs at the same time.
Earlier this year, Walgreens slashed its dividend, but I think an outright suspension would be the right move at this point to save further cash flow. Investors need the business to be in good shape, not for it to be paying a dividend that may not end up being sustainable.
2. Abandon or scale back its healthcare strategy
A big part of Walgreens' growth strategy these days is to launch hundreds of primary care clinics at its stores. It's a huge goal that could draw in more shoppers, effectively making its retail pharmacies more of a one-stop shop for customers. The problem is it will be a huge drain on the company's cash and resources.
Although it would be a drastic move, potentially abandoning the healthcare expansion or at least significantly scaling back on it may be a necessary move for the business. Even low-cost leader Walmart has given up on health clinics due to rising costs. If it can't succeed in that area, investors have to wonder just how much hope there is for Walgreens.
When Walgreens posted its latest earnings numbers in June, it said it was going to "simplify" and "focus" its U.S. healthcare portfolio, suggesting it's paring down its healthcare plans. Investors, however, should still look for bigger moves in this area. The company's U.S. healthcare segment has incurred an adjusted operating loss totaling $151 million over the nine-month period ended May 31. To conserve cash and improve profitability for the overall business, Walgreens may need to potentially abandon this strategy altogether.
3. Cut down the number of stores
Another issue with Walgreens is the company is simply too large for its own good. New CEO Tim Wentworth has uncovered that close to one-quarter of the company's stores aren't profitable, and he has indicated that there will be a review that will lead to a reduction in the pharmacy retailer's store count.
The company has more than 8,000 stores throughout the country, and that means potentially thousands of locations could be closed down. But Walgreens shouldn't target only the unprofitable ones, but also the stores which are only achieving minimal profitability.
To significantly improve its bottom line, the company should focus on a much leaner operating model, which involves a smaller footprint. If management starts to cut one-quarter of its stores, that will be a good start, but investors should demand more drastic measures.
4. Shrink its store sizes
Another way the company can become more efficient is by having smaller stores that take up less space and end up costing less money to run. Back in 2020, the company launched 30 small-format pharmacies that were one-quarter of their usual sizes (the average is around 13,500 square feet) to help reach people in more remote areas of the country. While that means there won't be as large of a selection in those stores, it will allow the company to focus on efficiency and stocking only the most important items, which can lead to better odds for profitability in the long run.
Shifting to smaller stores is something investors should expect from the business to not only cut costs, but also to adapt to changing market conditions as more shoppers rely on pickup orders and place orders online. While in-store shopping is still relevant, with many online shopping options to choose from and Amazon even offering delivery for prescriptions, Walgreens needs to focus more on efficiency if it wants to be able to compete against the low-cost leaders in retail.
Deploying smaller stores doesn't appear to be a huge part of Walgreens' strategy today, but it may need to be for the business to turn things around in the long run.
5. Carry fewer products
If Walgreens does opt for smaller stores, it will inevitably have to carry fewer products. That could be another great move for the bottom line by focusing mainly on high-margin items and products that draw customers into its stores. Too much selection and variety can unnecessarily raise costs for a business without necessarily making the business better off.
On Walgreens' latest earnings call , Wentworth did say the company has been changing up its product mix by removing eight national brands as it looks to "work with fewer partners who are helping us win."
That's a good sign that management is considering adjusting its product mix to focus on margins. In the trailing 12 months, Walgreens has posted a gross margin of just over 18%. This figure will need to be a lot stronger for the company to have any success in being able to turn a consistent profit.
Should you buy Walgreens stock?
Walgreens has been making some of the moves I've mentioned above, but until it makes all of them, and on a significant scale, I would avoid the stock. Competition is fierce in retail these days, and the company needs to adapt so that it doesn't end up following in the footsteps of Rite Aid . Under its new CEO, there's hope the business can turn things around, but it's far too early to know if Walgreens is going in the right direction.
For now, investors are better off avoiding this struggling healthcare business . Down around 60% so far this year, Walgreens stock remains a falling knife.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. David Jagielski 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 .
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