Walgreens (WBA)

Pharmacy chain Walgreens Boots Alliance (NASDAQ:WBA) reported Q1 CY2025 results topping the market’s revenue expectations, with sales up 4.1% year on year to $38.59 billion. Its non-GAAP profit of $0.63 per share was 21% above analysts’ consensus estimates.

Company Overview

Primarily offering prescription medicine, health, and beauty products, Walgreens Boots Alliance (NASDAQ:WBA) is a pharmacy chain formed through the 2014 major merger of American company Walgreens and European company Alliance Boots.

General merchandise retailers–also called broadline retailers–know you’re busy and don’t want to drive around wasting time and gas, so they offer a one-stop shop. Convenience is the name of the game, so these stores may sell clothing in one section, toys in another, and home decor in a third. This concept has evolved over time from department stores to more niche concepts targeting bargain hunters or young adults, and e-commerce has forced these retailers to be extra sharp in their value propositions to consumers, whether that’s unique product or competitive prices.

Competitors in pharmacy and health and wellness retail include CVS Health (NYSE:CVS), Walmart (NYSE:WMT), and Target (NYSE:TGT).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.

With $151.9 billion in revenue over the past 12 months, Walgreens is a behemoth in the consumer retail sector and benefits from economies of scale, giving it an edge in distribution. This also enables it to gain more leverage on its fixed costs than smaller competitors and the flexibility to offer lower prices. However, its scale is a double-edged sword because it’s harder to find incremental growth when you’ve penetrated most of the market. For Walgreens to boost its sales, it likely needs to adjust its prices or lean into foreign markets.

As you can see below, Walgreens’s sales grew at a sluggish 2.9% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts). This shows it failed to generate demand in any major way and is a rough starting point for our analysis.

This quarter, Walgreens reported modest year-on-year revenue growth of 4.1% but beat Wall Street’s estimates by 2.2%.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months, a slight deceleration versus the last six years. This projection is underwhelming and indicates its products will see some demand headwinds.

Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.

Walgreens has been one of the most successful retailers over the last two years thanks to skyrocketing demand within its existing locations. On average, the company has posted exceptional year-on-year same-store sales growth of 6.6%.

Note that Walgreens reports its same-store sales intermittently, so some data points are missing in the chart below.

We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate product differentiation, negotiating leverage, and pricing power.

Walgreens has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 18% gross margin over the last two years. Said differently, Walgreens had to pay a chunky $82.03 to its suppliers for every $100 in revenue.

This quarter, Walgreens’s gross profit margin was 18%, down 1 percentage points year on year but still exceeding analysts’ estimates by 2.7%. Walgreens’s full-year margin has also been trending down over the past 12 months, decreasing by 1.2 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to discount products and higher input costs (such as labor and freight expenses to transport goods).

Operating margin is a key profitability metric because it accounts for all expenses necessary to run a store, including wages, inventory, rent, advertising, and other administrative costs.

Despite the consumer retail industry’s secular decline, unprofitable public companies are few and far between. Unfortunately, Walgreens was one of them over the last two years as its high expenses contributed to an average operating margin of negative 7%.

On the plus side, Walgreens’s operating margin rose by 5.4 percentage points over the last year, as its sales growth gave it operating leverage. Still, it will take much more for the company to reach long-term profitability.

In Q1, Walgreens generated a negative 14.4% operating margin. The company's consistent lack of profits raise a flag.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Walgreens broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.

Taking a step back, an encouraging sign is that Walgreens’s margin expanded by 1.6 percentage points over the last year. We have no doubt shareholders would like to continue seeing its cash conversion rise as it gives the company more optionality.

Walgreens burned through $418 million of cash in Q1, equivalent to a negative 1.1% margin. The company’s cash burn slowed from $989 million of lost cash in the same quarter last year.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Walgreens’s five-year average ROIC was negative 14.8%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer retail sector.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Walgreens posted negative $1.82 billion of EBITDA over the last 12 months, and its $30.13 billion of debt exceeds the $1.13 billion of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

We implore our readers to tread carefully because credit agencies could downgrade Walgreens if its unprofitable ways continue, making incremental borrowing more expensive and restricting growth prospects. The company could also be backed into a corner if the market turns unexpectedly. We hope Walgreens can improve its profitability and remain cautious until then.

Given the pending transaction, pursuant to which WBA will be acquired by entities affiliated with Sycamore Partners, the company is withdrawing fiscal 2025 guidance. As for the quarter, we enjoyed seeing Walgreens beat analysts’ revenue and EPS expectations this quarter. Overall, this quarter was solid. The stock traded up 1.1% to $10.85 immediately after reporting.

Updated: May 22, 2025 at 11:46 PM EDT

Before deciding whether to buy Walgreens or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Walgreens isn’t a terrible business, but it doesn’t pass our bar. To kick things off, its revenue growth was uninspiring over the last six years, and analysts expect its demand to deteriorate over the next 12 months. And while its marvelous same-store sales growth is on another level, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its operating margins reveal poor profitability compared to other retailers.

Walgreens’s P/E ratio based on the next 12 months is 7.4x. While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $12.29 on the company (compared to the current share price of $11.24).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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