Walgreens Boots Alliance is a global leader in pharmacy-led health and wellness, leveraging its trusted brand and extensive scale to serve millions of customers daily. With a strategic focus on profitable pharmacies, expanding private label brands, and growth in its U.S. Healthcare segment, the company is positioning itself for long-term success. However, challenges such as competition, macroeconomic pressures, and third-party reimbursement risks remain. The question is: Does this retail pharmacy giant deserve a spot in your portfolio?
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
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The Business
Walgreens Boots Alliance is a global leader in pharmacy-led health and wellness retail, formed in 2014 through the merger of Walgreens in the United States and Alliance Boots in Switzerland. Operating across the U.S., Europe, Latin America, and Asia, the company has approximately 12.500 locations and employs over 312.000 people. It is the second-largest pharmacy chain in the United States, behind CVS Health. The business operates through three segments. The U.S. Retail Pharmacy segment, which contributes 78% of total revenue, includes Walgreens and Duane Reade stores. This segment provides prescription drugs, health and wellness products, beauty items, and home delivery pharmacy services. Walgreens is a key player in the U.S. market, with 78% of the population living within five miles of a store. The International segment accounts for 16% of revenue and encompasses Boots-branded stores in the UK, Ireland, and Thailand, as well as Benavides in Mexico. Boots has a strong presence in the UK, offering prescription drugs, health products, and exclusive brands like No7 and Soap & Glory. This segment also includes a pharmaceutical wholesaling business in Germany. The U.S. Healthcare segment, contributing 6% of revenue, focuses on value-based healthcare. It includes VillageMD, Shields, and CareCentrix, which provide primary care, specialty pharmacy services, and post-acute care solutions. Walgreens Boots Alliance has several strengths that provide it with a moat. Its global scale and distribution network position it as one of the largest purchasers of prescription drugs and health-related products, enabling pricing power and supply chain efficiencies. The Walgreens and Boots brands enjoy significant consumer trust, built over more than a century of history, which fosters strong customer loyalty. The company’s integration of physical stores with digital platforms enhances customer convenience through services like click-and-collect, home delivery, and app-based prescription management.
Management
Tim Wentworth is the CEO of Walgreens Boots Alliance, a role he assumed in October 2023. With nearly 30 years of experience in the healthcare industry, he brings a wealth of knowledge and expertise to the position. Before joining Walgreens Boots Alliance, Wentworth served as CEO of Express Scripts, where he successfully grew the company into a Fortune 22 organization with over $100 billion in revenue and 26.000 employees. During his tenure, Express Scripts also earned a spot on Forbes' list of the World's Most Innovative Companies, ranking at number 66. Tim Wentworth’s leadership style is marked by a focus on operational excellence and innovation. At Walgreens Boots Alliance, he is driving a strategic vision to deliver more personalized, coordinated care while achieving better health outcomes at lower costs. His emphasis on modernizing the company’s operations and expanding its healthcare offerings aligns with its broader goal of transitioning into a full-scale healthcare organization. Since taking the helm, Tim Wentworth has built a new leadership team and introduced a disciplined approach to financial management. Under his guidance, the company has achieved significant milestones, including reducing net debt and stabilizing pharmacy market share for the first time in years. Additionally, he has overseen a strategic review that has informed key initiatives such as the modernization of retail operations, including merchandising, digital strategies, and loyalty programs. Tim Wentworth’s educational background includes a bachelor's degree in Industrial and Labor Relations from Cornell University and an honorary doctorate from the State University of New York. His credentials, combined with his extensive experience, make him well-suited to guide Walgreens Boots Alliance through its next phase of growth.
The Numbers
The first number I will investigate is the return on invested capital, also known as ROIC. Ideally, a consistent ROIC above 10% is desirable. For Walgreens Boots Alliance, however, ROIC has been underwhelming over the past decade, exceeding the 10% benchmark in only four of the last ten years. Several external factors have influenced these results. Fiscal 2020 was notably impacted by the pandemic, which disrupted the company’s operations. More recently, the opioid settlement significantly affected ROIC in 2023, and a large impairment charge related to the acquisition of VillageMD weighed heavily on fiscal 2024 results. There were encouraging signs in fiscal 2022, when Walgreens Boots Alliance achieved a ROIC above 10%, marking a recovery from the pandemic’s challenges. However, this improvement did not sustain, as subsequent years were impacted by extraordinary factors, including the opioid settlement in 2023 and a significant impairment charge in 2024. While I discount these years due to their exceptional charges, the broader trend reveals mostly underwhelming performance in terms of ROIC over the past decade.
The following numbers represent the book value + dividend, previously referred to as the equity growth rate. This metric has been the most important of the four growth rates I use in my analyses, which is why I will continue to include it in the future. For clarity, I have provided both the actual numbers and the year-over-year percentage growth. Equity has steadily declined since its peak in 2015. There were some encouraging signs in 2021 and 2022, with equity growing in both years. However, 2023 saw a significant drop, marking the lowest point in the past decade, followed by a nearly 50% reduction in 2024. This sharp decline was primarily driven by the financial impact of the opioid settlement and a substantial impairment charge related to acquisitions. Moving forward, it will be crucial for Walgreens Boots Alliance to demonstrate sustained equity growth to instill confidence in its financial health and future prospects.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Walgreens Boots Alliance consistently achieved positive free cash flow over the past decade until fiscal year 2024, when it turned negative. This decline was primarily driven by elevated inventory levels and impairment charges. Management has expressed optimism about returning to positive free cash flow in fiscal year 2025, which is an encouraging sign. Historically, Walgreens Boots Alliance has maintained a low levered free cash flow margin due to the nature of its business, but it is concerning that margins have remained below 5% since 2018. In fiscal year 2024, the negative free cash flow yield reflects the inability to use this metric to assess whether the stock is trading at an attractive valuation. We will explore valuation in more detail later in the analysis.
Debt
Another important aspect to consider is the level of debt and whether it is manageable within a three-year period. This can be assessed by calculating the ratio of long-term debt to earnings. However, since earnings were negative in 2024 and 2023, this calculation cannot be performed for those years. Using 2022 data, the calculation shows that Walgreens Boots Alliance had 2,45 years of earnings in debt, which falls below the three-year threshold. This indicates that debt levels were manageable based on those figures. Additionally, management has prioritized debt repayment over the past two fiscal years, which is an encouraging sign for the company’s financial health. While debt levels do not currently raise major concerns, monitoring future performance will be essential as the company works to restore profitability.
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Risks
Competition poses a significant risk for Walgreens Boots Alliance due to the dynamic and highly competitive industries in which it operates. In the retail pharmacy market, Walgreens faces competition from chain and independent pharmacies, mail-order providers, grocery stores, and online retailers like Amazon Pharmacy. The rise of digital platforms and home delivery services has disrupted traditional business models, with competitors leveraging technology and aggressive pricing to capture market share. In healthcare services, Walgreens’ expansion into areas like value-based care, virtual care, and post-acute care brings direct competition with urgent care providers, integrated healthcare systems, and digital health platforms. Companies such as CVS Health and UnitedHealth Group have gained strong positions through strategic alliances and service integration, further intensifying the competitive pressure. Industry consolidation and disruptive innovation are continuously altering the competitive landscape. Competitors are expanding their offerings, improving efficiency, and negotiating better pricing, forcing Walgreens to adapt quickly. The emergence of digital health startups and new technologies has heightened the demand for convenience and personalized services. To maintain its market position, Walgreens must continue to innovate and strategically evolve to meet these changing demands.
Macroeconomic conditions pose a significant risk for Walgreens Boots Alliance due to their impact on consumer behavior, input costs, and overall business operations. Rising inflation, higher interest rates, and reduced disposable income can weaken consumer confidence and alter spending patterns, leading to lower sales across both essential and non-essential categories. When economic conditions deteriorate, consumers tend to focus on necessities and become more price-sensitive, which has already contributed to sales pressure in Walgreens’ retail pharmacy segment, particularly in non-essential categories. Inflation presents another critical challenge. Rising transportation, energy, and other input costs strain profitability. While Walgreens may attempt to offset these costs by raising prices, this risks further dampening demand, especially among cost-conscious shoppers. The company has already experienced margin compression in its U.S. Retail Pharmacy segment due to inflation, and similar pressures may affect its U.S. Healthcare segment. The near-term outlook suggests continued pressure on consumers, as management expects price sensitivity and cautious spending behavior to persist. This dynamic could push Walgreens and its competitors to offer more promotions or lower-priced products, further compressing margins and challenging profitability.
Third-party reimbursement risk. Walgreens Boots Alliance faces significant challenges due to its reliance on third-party payors, including insurance companies, pharmacy benefit managers (PBMs), and government programs such as Medicaid. These payors reimburse Walgreens for the majority of prescriptions it fills but consistently aim to reduce costs. This creates pressure on Walgreens to accept lower reimbursement rates, which can negatively affect its revenue and profitability. Negotiating with PBMs is a routine but challenging part of Walgreens’ business. Outcomes are not always favorable, as PBMs may impose terms that are difficult to accept or restrict Walgreens’ participation in their pharmacy networks. Given that a substantial portion of Walgreens’ prescription sales comes from a small number of PBMs, losing access to these networks could have a significant financial impact. If Walgreens is excluded from a PBM’s network, many customers are likely to switch to pharmacies that remain within the network. While the company can work to regain access or win back customers, this process can take time, and not all customers may return. The resulting loss of prescription volume and associated revenue underscores the critical importance of maintaining strong relationships with third-party payors.
Reasons to invest
Walgreens Boots Alliance's focus on profitable pharmacies is a compelling reason to consider investing in the company. By realigning its retail footprint and prioritizing high-performing locations, Walgreens is enhancing efficiency and positioning itself for improved long-term financial outcomes. This strategic shift reflects a leaner, more focused approach to retail pharmacy operations, leveraging its core strengths in consumer trust, convenience, and relevance. The company plans to close approximately 1.200 underperforming stores over the next three years, targeting locations with weak cash flow, expiring leases, or suboptimal performance. This footprint optimization allows Walgreens to redirect resources toward its 6.000 profitable stores, which form a solid foundation for growth. Investments in these high-performing locations aim to enhance the in-store experience, attract more foot traffic, and boost customer loyalty, aligning with Walgreens’ vision of providing an industry-leading retail and pharmacy experience across all channels. The financial benefits of this program are already emerging. Walgreens expects these closures to generate approximately $100 million in annual operating income in fiscal 2025, with further contributions in subsequent years. This approach not only strengthens short-term cash flow but also funds strategic investments in retained stores, supporting the company's long-term growth objectives.
Walgreens Boots Alliance’s U.S. Healthcare segment represents a compelling reason to invest, as it demonstrates consistent growth, disciplined strategy, and opportunities for value creation. The segment exceeded expectations in fiscal year 2024, driven by key contributors like VillageMD and Shields, which are delivering growth through operational improvements, cost discipline, and expanded partnerships. Shields is a standout performer, with a 28% year-over-year increase in sales fueled by deeper integration into existing partnerships. This underscores the segment’s ability to generate recurring and expanding revenue streams from its core specialty pharmacy offerings, which align with industry trends favoring personalized and high-value care. VillageMD also shows promise, despite challenges such as clinic closures and strategic repositioning. A significant cost reduction program has improved margins and enhanced efficiency, positioning the business for stronger performance in fiscal 2025. The company expects further benefits from these measures, including higher fee-for-service volumes and modest growth in risk-based revenue streams. The strategy to monetize non-core assets, including VillageMD, offers additional upside. Proceeds from these sales are expected to strengthen Walgreens’ balance sheet and fund further growth initiatives. With its focus on operational discipline and value creation, the U.S. Healthcare segment is well-positioned to contribute meaningfully to Walgreens’ long-term success.
Walgreens Boots Alliance’s focus on expanding its private label brands is a compelling reason to consider investing in the company. Private label products offer significant advantages, including higher profit margins, increased customer loyalty, and the ability to differentiate Walgreens from competitors through unique, exclusive offerings. Walgreens is actively reevaluating its merchandising strategy to prioritize its own brands, particularly in categories where it is well-positioned to lead, such as health and wellness and women’s health. In fiscal 2024, Walgreens launched over 300 new private label products and plans to introduce another 300 in fiscal 2025. This focus on innovation aligns with shifting consumer behavior, as value-conscious shoppers increasingly opt for store-brand alternatives. Walgreens has already reaped benefits, with private label penetration rising 70 basis points to over 17% of sales by the end of fiscal 2024. Private label merchandise is a core component of Walgreens’ front-end strategy because these products typically yield higher profit margins than national brands. By carefully refining its national brand offerings and expanding its store-brand assortment, Walgreens is cultivating a more profitable and strategically targeted product mix. Additionally, the company is incentivizing its frontline team members to promote these products, further enhancing visibility and driving sales. Walgreens is also leveraging its reputation as one of America’s most trusted brands to strengthen the appeal of its private label offerings. Customers already trust Walgreens for health and wellness, and the company is using this trust to position its store brands as reliable, high-quality, and value-driven options. This trust factor gives Walgreens a unique competitive edge in developing innovative and exclusive products that attract traffic and build customer loyalty.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. Walgreens Boots Alliance had a negative EPS in fiscal 2024. However, adjusted EPS was $2,88. Thus, I have decided to use an EPS of 2,88. I have selected a projected future EPS growth rate of 5%, which is the analysts' consensus. Additionally, I have chosen a projected future P/E ratio of 10, which is twice the growth rate. This decision is based on the fact that Walgreens Boots Alliance has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $11,60. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Walgreens Boots Alliance at a price of $5,80 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 1.018, and capital expenditures were 1.381. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a general guideline, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 967 in our calculations. The tax provision was 1.386. We have 863,49 outstanding shares. Hence, the calculation will be as follows: (1.018 – 967 + 1.386) / 863,49 x 10 = $16,64 in Ten Cap price.
The final calculation is the Payback Time price, which estimates how long it would take to recoup an investment based on the company’s free cash flow per share. However, Walgreens Boots Alliance reported negative free cash flow per share in fiscal year 2024, making this calculation impossible.
Conclusion
Walgreens Boots Alliance is a company with a long history and a moat derived from its trusted brand and extensive scale. Under its relatively new CEO, the company has built a fresh leadership team and adopted a disciplined approach to financial management. This has enabled progress in reducing net debt and stabilizing pharmacy market share for the first time in years. However, the company has faced significant challenges, including the opioid settlement and impairment charges related to the acquisition of VillageMD, resulting in two consecutive years of negative ROIC and negative free cash flow in fiscal 2024. Competition poses a risk for Walgreens Boots Alliance, as it faces pressure from traditional pharmacies, online retailers, and integrated healthcare providers. The rise of digital platforms and evolving consumer preferences requires continuous innovation to maintain market share. Additionally, macroeconomic factors such as inflation, higher interest rates, and reduced disposable income have weakened consumer spending and compressed margins. Third-party reimbursement remains a significant challenge, as reliance on payors like PBMs and government programs exposes Walgreens to cost-cutting pressures and potential revenue losses from restricted network access. Despite these risks, the company has strategic initiatives that make it an interesting prospect. Focusing on profitable pharmacies by closing underperforming stores and prioritizing high-performing locations has improved efficiency, strengthened cash flow, and supports long-term growth. The U.S. Healthcare segment, driven by strong performers like Shields and VillageMD, is delivering consistent growth and expanding revenue streams. Additionally, Walgreens’ emphasis on private label brands offers higher profit margins, attracts value-conscious shoppers, and differentiates the company through unique offerings. While Walgreens Boots Alliance is making progress under new management and appears to be heading in a positive direction, I have decided not to invest in the company at this time.
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