Walgreens is in 'structural decline': Portfolio manager

Walgreens (WBA) shares sink lower Thursday morning after the pharmacy chain missed on fiscal third-quarter earnings and slashed its full-year profit guidance. Walgreens announced plans to even close a "significant" portion of underperforming US store locations.

Catalysts brings on Gabelli Funds Portfolio Manager Jeff Jonas to talk more about Walgreens' predicament, strategies it could use to recover, and the challenges the broader industry faces.

"It's just in structural decline, and despite new management, despite maybe selling off some non-core assets, I don't really see a turnaround here," Jonas states, making the case for what could change his mind: "Well, I definitely would need to see margin improvement and closing some of those marginally or unprofitable stores could help with that."

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Luke Carberry Mogan.

Video Transcript

Well, Walgreens shares are plunging this morning after slashing their full year profit outlook, citing a quote, continued challenging environment.

So what should that signal for investors moving forward?

We've got Jeff Jonas funds portfolio manager joining us on this.

Thank you so much for coming here with us on this somewhat breaking news this morning.

Just given the amount of the stock movement that we are seeing.

What is your statement to investors who are watching this right now, who might own the stock?

What should they do with it?

You know, unfortunately, I think I would sell the shares.

I just don't see a clear path to a turnaround here and it's really just in the US where we have a lot of reimbursement pressure in the pharmacy where we have a weak consumer and I think it's just in structural decline and despite new management, despite maybe selling off some non core assets, I I don't really see a turnaround here.

What would it take for you to be convinced of a turnaround?

I guess in terms of the strategy, a couple of things that were outlined by the new CEO on the call earlier today, just in terms of the priorities and different initiatives that they are taking, like closing some of their stores.

What do you need to see in order to be more convinced of that turnaround?

Well, I definitely would need to see margin improvement and closing some of those marginally or unprofitable stores could help with that and then selling off some non core assets like maybe boots in the UK or maybe selling down some of their ownership in Village MD to pay down debt and strengthen the balance sheet.

I think those would be positive steps.

I'm just not sure if I see that happening yet.

So given that, do you see a route where this is a company that can't recover that goes under?

I don't think we're anywhere near that point.

I mean, they cut the dividend last year to make it more sustainable and again, to free up a lot of cash.

Uh again, I think they have assets to sell, to pay down debt.

Um But I think it's in structural decline and, you know, with earnings declining again in next fiscal year, it only trades at about six times earnings, but I, I just don't really see a clear path to growth again.

Jeff, I'm curious, uh and I'm not sure if you, if you own CV S but just more broadly speaking, when you take a look at some of the issues that we're clearly seeing at Walgreens and compare that to some of the other trends within the sector?

Is this more of a Walgreens specific issue or are we seeing some of this, we, as we talk about consumers no longer spending or maybe trading down the, obviously the uh rampant uh uh uh theft that is occurring really across the retail space.

How many of these issues are specific to Walgreens versus broader weakness across the sector?

Yeah, I think these are industry issues.

I think they will impact CV.

Si mean with the weak consumer, with higher prices at the pharmacy.

I mean, consumers aren't paying that anymore.

They're going to Amazon, they're going to Costco or Walmart.

So that's forcing the pharmacies to cut price on a lot of those store items which directly hurts the profit margins.

And CV S has other issues too where they have challenges in their Medicare advantage business on the Aetna side of things and they lost a big pharmacy benefits contract with Cent team this year.

So I think they have a lot of challenges too.

We've seen more broadly in the healthcare sector.

A lot of names benefiting off the G LP one craze and demand.

Why isn't WB A seeing that same benefit?

Yeah, because of their high prices, uh G LP ones are actually very low margin for the drug wholesalers who move them to market and for the pharmacies who dispense them, you know, a lot of them need to be frozen.

So there's special handling requirements and they're just incredibly low margin or, or possibly even no margin um for a lot of the people in the supply chain, it, it's really just the manufacturers who are profiting from this.

Mm Yeah.

Really good point, Jeff.

All right, we're gonna have to leave it there, but thank you so much for joining us on this.

We really appreciate it.

That was Jeff Jonas.

He is Gabelli Funds Portfolio manager.