To The Moon

$Walgreens Boots Alliance(WBA)$

Walgreens Boots Alliance (NASDAQ: WBA), one of America’s most well-known pharmacy chains, has faced tremendous headwinds over the past few years. Once a dividend stalwart and defensive play in the healthcare retail space, WBA has lost its shine amid operational struggles, shifting consumer behaviors, reimbursement pressures, and competition from disruptive entrants like Amazon. After falling over 70% from its 2015 highs and recently hitting multi-decade lows, investors are left asking: is WBA a value opportunity or a classic value trap?

This article explores the latest earnings report, fundamental financials, free cash flow trends, valuation metrics, risk factors, and prevailing market sentiment to provide a well-rounded view of Walgreens' investment case heading into the second half of 2025.

Earnings Overview: Another Tough Quarter

In its latest fiscal Q3 2025 earnings report (released in June), Walgreens posted revenue of $36.4 billion, up just 2.6% year-over-year, narrowly beating Wall Street expectations. However, the headline numbers quickly gave way to disappointment further down the income statement.

Operating income came in at just $372 million, down over 35% from the year-ago period, and adjusted EPS dropped to $0.63 — missing consensus estimates by a wide margin. Management also cut its full-year EPS guidance for the second time in the past three quarters, now forecasting FY25 adjusted EPS in the range of $2.80 to $2.95, well below previous expectations.

The primary culprit remains the U.S. retail pharmacy segment, which continues to experience negative comparable prescription volumes, weaker front-end sales, and reimbursement pressures. Pharmacy margins were down again, and store traffic remains sluggish despite an uptick in demand for flu and COVID vaccines. The international segment, particularly Boots UK, saw modest stabilization, but not enough to offset broader domestic weakness.

To make matters worse, Walgreens also announced plans to close another 150 U.S. locations, signaling ongoing concerns about profitability and scalability in its core business model.

Fundamental Analysis: A Business at a Crossroads

From a fundamental standpoint, Walgreens appears cheap on the surface — trading at around 5x forward earnings and less than 0.2x sales. However, these metrics mask deeper structural issues.

Revenue has grown only modestly over the past five years, with topline figures largely stagnant outside of occasional pandemic-related bumps. Gross margins have compressed from over 24% in 2015 to under 19% in recent quarters. Meanwhile, operating margins — once comfortably above 6% — have fallen to just 1%–2% as of FY2025.

A key issue is that Walgreens operates in a highly commoditized space. Pharmacy benefit managers (PBMs), insurers, and government payers have all increased pricing pressure, while labor costs are rising, and front-store sales continue to be cannibalized by e-commerce. The company’s venture into healthcare services — including acquisitions like VillageMD — has so far failed to produce meaningful margin expansion or profitability.

Furthermore, while management has been touting a multi-year transformation strategy, execution has lagged. Strategic initiatives such as revamping stores, investing in omnichannel platforms, and integrating primary care offerings have come with heavy costs and slow adoption, pressuring near-term returns on capital.

Free Cash Flow: A Worrying Decline

One of the biggest red flags for long-term investors is Walgreens’ deteriorating free cash flow (FCF) profile. In fiscal 2020, the company generated nearly $4 billion in FCF. As of the trailing twelve months, FCF has shrunk to below $500 million.

This deterioration is driven by three key factors:

1. Lower profitability – operating margins have collapsed, and EBIT has significantly compressed.

2. Capex pressure – WBA has ramped up capital investments into healthcare ventures and store revamps, with annual capex exceeding $2 billion in FY2024.

3. Working capital inefficiencies – elongated inventory cycles and receivables timing issues have impacted cash conversion.

As a result, WBA’s ability to fund dividends, buybacks, and debt reduction through internally generated cash has been severely curtailed. In fact, the company was forced to slash its dividend in early 2024 by nearly 50%, ending its nearly five-decade streak of annual dividend increases — a move that severely dented investor confidence.

At current levels, WBA’s dividend payout ratio relative to FCF remains elevated and unsustainable unless operating performance improves markedly.

Risks and Challenges: Structural Headwinds Abound

Walgreens’ path forward is riddled with risks that investors must carefully weigh:

1. Secular decline in traditional retail pharmacy

WBA’s core business model is increasingly obsolete. Consumers are shifting to digital prescription services, home delivery, and telehealth. Large insurers and PBMs are vertically integrating with their own pharmacy networks, reducing dependence on third-party players like Walgreens.

2. Execution risk in healthcare transformation

Walgreens is betting big on its transition to a healthcare services platform. But turning pharmacy chains into integrated care hubs is easier said than done. VillageMD is still unprofitable, and prior ventures into digital health have largely flopped.

3. Debt burden

WBA carries over $30 billion in total liabilities, including nearly $10 billion in long-term debt. With interest rates elevated and credit markets tighter, refinancing or expanding the debt load for growth initiatives may prove costly.

4. Labor and regulatory issues

Pharmacies are facing labor shortages, union pressures, and increasing scrutiny over controlled substance dispensing. Walgreens has already been hit with opioid litigation settlements and could face more regulatory headwinds in future.

Valuation: Cheap for a Reason?

At a glance, WBA looks like a classic deep value play:

• Price-to-Earnings (Forward): ~5x

• Price-to-Sales: ~0.2x

• Price-to-Book: ~0.7x

• Dividend Yield: ~4.5% (post-cut)

However, value investors must ask whether the stock is cheap or if it’s simply reflecting a structurally broken business. Walgreens’ valuation is consistent with declining retail operators, not growth-stage healthcare disruptors. In fact, if the VillageMD strategy continues to underperform, the company may find itself stuck between two worlds — neither a successful healthcare services provider nor a stable retail cash cow.

A discounted cash flow (DCF) model using conservative assumptions (zero revenue growth, 2% long-term terminal growth, and 8% WACC) suggests a fair value in the $16–$18 range, only slightly above current prices. This implies limited upside unless the company can significantly improve profitability and restore FCF generation.

Market Sentiment: Capitulation or Cautious Reassessment?

Investor sentiment toward WBA remains overwhelmingly negative. As of July 2025, short interest stands near 6%, and analyst coverage has mostly shifted to “hold” or “underperform” ratings. Institutional ownership has declined steadily, with many large asset managers trimming exposure following the dividend cut.

Retail investor sentiment is also muted. On platforms like Seeking Alpha and Reddit’s investing forums, discussions around WBA often include terms like “value trap,” “dividend disappointment,” and “dead money.”

However, there are some glimmers of contrarian optimism. A few value-oriented hedge funds have begun nibbling at shares, betting that the sum-of-the-parts valuation (real estate holdings, Boots UK spinoff potential, and healthcare partnerships) could provide some downside protection. Additionally, management's recent cost-cutting initiatives and CEO restructuring efforts may bear fruit over a longer horizon.

But make no mistake — this remains a deeply out-of-favor stock for now.

Conclusion: A High-Risk Turnaround Play, Not for the Faint-Hearted

Walgreens Boots Alliance finds itself at a critical inflection point. The company’s stock is historically cheap, and its once-iconic dividend yield is now somewhat stabilized after a necessary reset. But this is not the safe, defensive play it once was.

Earnings remain under pressure, margins are thin, free cash flow is fading, and the company faces significant execution risks as it tries to pivot into primary care. The valuation may look appealing at first glance, but a deeper dive reveals why the market has been so unforgiving.

Investors seeking high-conviction turnaround plays might find WBA worth a small speculative position — especially if one believes in management’s ability to deliver on its long-term healthcare vision. But for income-oriented or conservative investors, there are safer places to park capital in the healthcare or consumer staples sectors.

Walgreens is cheap, but it’s cheap for a reason. Unless the company can reignite free cash flow and demonstrate tangible progress in its healthcare transformation, this stock could remain dead money for years to come.

Investment Verdict: Neutral to Cautiously Bearish Target Range (12–18 Months): $16–$20 Key Catalysts to Watch: VillageMD profitability, further asset sales (Boots UK), debt refinancing updates, store closure impacts, next earnings cycle

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

@Daily_Discussion @TigerPM @TigerObserver @Tiger_comments @TigerClub