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    Walgreens Boots Alliance Inc (WBA)

    Q3 2024 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$15.66Last close (Jun 26, 2024)
    Post-Earnings Price$12.56Open (Jun 27, 2024)
    Price Change
    $-3.10(-19.80%)

    What went well

    • Walgreens Boots Alliance is actively restructuring to enhance operational efficiency and profitability, including plans to optimize its store footprint by closing underperforming locations (approximately 25% of stores), investing in store experience, and leveraging automation to improve back-end operations.
    • The company is engaging in constructive negotiations with PBMs and payers to reshape reimbursement models, aiming to be fairly compensated for the value provided and improve pharmacy margins.
    • Walgreens is focusing on strengthening its customer relationships through an expanded loyalty program and enhanced pharmacy services, leveraging its large customer base of over 120 million myWalgreens members.

    What went wrong

    • Persistent challenges in U.S. consumer spending and retail pharmacy margins are negatively impacting Walgreens Boots Alliance's financial performance, with the company noting that the consumer environment remains challenging, leading to investments in pricing and promotions that have reduced retail gross margins.
    • Pharmacy margins are under pressure due to several factors including reimbursement pressures, fluctuations in NADAC pricing, and lower script volume growth, which are expected to continue into fiscal 2025, potentially hindering profitability recovery.
    • The planned closure of a significant portion of underperforming stores (25% of the store network) over the next three years indicates operational challenges and may lead to disruptions in revenue and customer base, raising concerns about the company's market coverage and competitive position.

    Q&A Summary

    1. Store Closures Impact
      Q: What is the financial impact of closing underperforming stores?
      A: Closing underperforming stores will lead to accretion both on cash flow and adjusted EPS. We retain nearly all prescriptions from closed stores , and we will reduce fixed costs accordingly. We are conducting detailed analyses to ensure we maintain appropriate coverage for payers and customers.

    2. Cash Flow Expectations
      Q: What are the free cash flow expectations for Q4 and 2025?
      A: We expect positive free cash flow in Q4, similar to the third quarter. Boosting cash flow is a top priority, and all actions outlined will continue to improve our cash flow position. We will provide detailed guidance for fiscal 2025 in October.

    3. Gross Margin Outlook
      Q: Can you explain the low retail gross margin and outlook?
      A: The gross margin was impacted by investments in price and promotions due to a challenging consumer environment. This trend is expected to continue into Q4. Pharmacy margins were affected by fluctuations in NADAC, generic launches with branded-like procurement dynamics, and unfavorable brand mix.

    4. Earnings Guidance for Fiscal 2025
      Q: Are we looking at earnings in the low $2 range for 2025?
      A: We are not providing specific earnings guidance for 2025 at this time. However, we anticipate approximately $0.75 headwind due to the wind-down of the sale leaseback program, sale of Cencora shares, and a more normalized tax rate. We expect profitability growth in our U.S. Healthcare and International segments.

    5. Future of Pharmacy and Reimbursement
      Q: What is your view on the future of pharmacy and reimbursement models?
      A: We are transforming both the front and back of the store to meet consumers where they are. This includes optimizing store footprint, enhancing loyalty programs, and automating pharmacy workflow. We are collaborating with PBMs to change outdated reimbursement models and ensure fair payment for the value pharmacists provide.

    6. Prescriptions Below Pre-Pandemic Levels
      Q: Why are prescriptions not back to pre-pandemic levels?
      A: The market has slowed due to Medicaid redetermination, with 18 to 20 million individuals losing coverage. Patients have not picked up new coverage as quickly, leading to reduced utilization. We are growing with the market, which is currently running below pre-pandemic growth rates.

    7. U.S. Healthcare Strategy
      Q: What is the forward strategy for U.S. Healthcare regarding value-based care?
      A: We strongly believe in value-based care and will continue to be an investor in VillageMD. We plan to focus on capital-light services and partner across the industry with providers and payers. We are stopping activities that don't fit this focus or create near-term value.

    8. Retention of Prescriptions from Closed Stores
      Q: How much of the prescriptions will you retain from closed stores?
      A: We retain nearly all prescriptions from closed stores. Our experience from closing 2,000 locations over the last 10 years gives us confidence in retention rates.

    9. Payer Conversations and Reimbursement
      Q: Have any payers agreed to terms that help stabilize things?
      A: We are in collaborative discussions with PBM partners to reshape reimbursement models. There is an understanding that the old playbook is outdated, and incentives need to be better aligned.

    10. Leases and Cash Flow Impact
      Q: Can you exit long-term leases of closed stores?
      A: Many stores are on favorable corners, allowing us to minimize lease carry costs when closing. We are engaging differently to reduce lease overhangs, and this is part of our economic analysis.

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