Walgreens Boots Alliance: Navigating Near-Term Storms for Long-Term Gains?

Charles HayesWednesday, Jun 25, 2025 2:11 pm ET
2min read

Walgreens Boots

Alliance
(WBA) stands at a pivotal crossroads. The pharmacy giant is undergoing a dramatic restructuring, facing legal headwinds, and navigating a potential leveraged buyout—yet its stock trades at a valuation that hints at overlooked opportunities. For investors, the question is whether the near-term turbulence obscures long-term value or signals deeper structural issues.

Mixed Financial Performance: Progress Amid Pain

WBA's fiscal 2025 second-quarter results revealed both resilience and vulnerability. While the company narrowed its loss to $3.30 per share (from $6.85 a year ago), the improvement relied heavily on a $1.0 billion gain from asset sales, offset by $4.2 billion in non-cash impairments—primarily at its U.S. Retail Pharmacy division. Sales grew 4.1% year-over-year to $38.6 billion, driven by strong prescription volumes and international growth (Boots UK sales rose 5.1% on a constant-currency basis). However, U.S. front-end sales (beauty, general merchandise) slumped 5.5%, highlighting ongoing struggles in discretionary spending.

The bigger concern is legal costs, which totaled $969 million in the quarter, primarily from opioid-related litigation. Year-to-date legal payments hit $1.1 billion, underscoring the financial burden of these lawsuits. Meanwhile, the U.S. Healthcare segment, including VillageMD, saw sales drop but posted operational improvements. Still, a $3.3 billion goodwill impairment at VillageMD reflects reduced valuations amid shifting market expectations.

Strategic Restructuring: Cutting Costs, Betting on Pharmacy

WBA's turnaround hinges on rationalizing its footprint. The company plans to close 450 stores by fiscal year-end, focusing on high-margin pharmacy services and cost-cutting. Its micro-fulfillment centers (MFCs)—which streamline prescription processing—are a bright spot, now handling 40% of prescriptions at supported stores. This efficiency has boosted prescription volume by 24% year-over-year, a critical edge in a market where

Amazon
and others are encroaching.

Internationally, Boots UK and Germany are outperforming, though currency headwinds shaved 3.5% off reported sales. WBA's focus on core markets and asset-light opportunities (e.g., pharmacy-driven healthcare) could stabilize margins over time.

The Sycamore Acquisition: Catalyst or Detriment?

The proposed $23.7 billion buyout by Sycamore Partners looms large. Closing by year-end is contingent on regulatory approvals and shareholder votes. The deal offers $11.45 per share in cash at closing, with non-transferable DAP Rights potentially adding $3.00 per share from future monetization of VillageMD and other assets. However, risks abound:

  • Debt Overhang: The transaction is 83% debt-financed, raising concerns about liquidity.
  • Regulatory Scrutiny: Antitrust challenges could delay or complicate the deal.
  • Execution Uncertainty: Sycamore's retail expertise contrasts with its limited healthcare experience, leaving integration risks.

Critically, WBA withdrew its fiscal 2025 guidance due to the acquisition's uncertainty, leaving investors without visibility on operational targets.

Analyst Sentiment: A Divided Market

Analysts are split. The consensus rating is “Reduce”, with 15 recent analyses reflecting cautious sentiment. However, the average 12-month price target of $24.36—34% above current levels—hints at optimism. Key points of divergence:

  • Bull Case: Low valuation (Forward P/E of 7.52, vs. 20+ for peers), dividend yield (8.81%), and DAP upside.
  • Bear Case: Debt (Debt-to-Equity of 428%), execution risks, and the $350 million opioid settlement (April 2025) that may not fully resolve legal exposure.

Investment Considerations

For investors weighing WBA, here's a framework:

Near-Term Risks:
1. Legal Costs: Ongoing settlements could strain cash flow.
2. Store Closures: Execution risks and customer attrition.
3. Sycamore Deal: Regulatory delays or failure to close could destabilize the stock.

Long-Term Opportunities:
1. Valuation Discount: At $11.33, WBA trades at a steep discount to its potential post-buyout and turnaround.
2. DAP Rights: If the Divested Assets Committee successfully monetizes VillageMD et al., shareholders could gain $3.00+ per share.
3. Core Business Strength: Pharmacy-driven revenue (rising prescription inflation) and international growth (Boots UK) offer a stable base.

Final Take

Walgreens Boots Alliance is a high-risk, high-reward bet. The near-term is fraught with legal, operational, and regulatory hurdles. Yet, the stock's valuation, dividend yield, and DAP upside create a compelling asymmetric opportunity for long-term investors willing to endure volatility.

Actionable Advice:
- Buy-and-Hold Investors: Consider a small position, targeting the $11–$12 range. Focus on the $24+ price target and DAP upside.
- Avoid: Near-term traders and risk-averse investors—earnings misses (next report on June 26) or regulatory setbacks could amplify downside.

In the end, WBA's path forward depends on executing its turnaround, resolving legal issues, and closing the Sycamore deal. For those with a multi-year horizon, the stock may prove a bargain—if the storms pass.