Executive Summary / Key Takeaways

• Walgreens Boots Alliance is undergoing a fundamental reorientation, pivoting back to its core strength as a retail pharmacy-led company after years of diversification and challenges that led to significant financial strain and asset impairments.
• A key strategic initiative is a significant footprint optimization program, planning the closure of approximately 1,200-1,300 underperforming U.S. stores by the end of fiscal 2027, aiming to create a healthier, more efficient store base and improve cash flow.
• The company is actively working to stabilize pharmacy margins by reframing reimbursement discussions with payers and PBMs for fairer value and exploring alternative models, while also focusing on enhancing operational efficiency through technology like micro-fulfillment centers.
• Efforts to strengthen the balance sheet are paramount, including aggressive cost reduction, capital expenditure discipline, working capital improvements, monetization of non-core assets (like VillageMD and Cencora shares), and the recent suspension of the quarterly dividend.
• While facing ongoing headwinds from a challenging U.S. retail environment, pharmacy reimbursement pressures, and execution risks, the company's reaffirmed FY2025 adjusted EPS guidance of $1.40-$1.80 signals a "rebasing year" focused on building a foundation for potential longer-term growth, contingent on successful strategic execution and market stabilization.

Setting the Scene: A Legacy Undergoing Transformation

Walgreens Boots Alliance, a name synonymous with community pharmacy for over 175 years, stands at a pivotal juncture. Once a dominant force built through organic growth and strategic acquisitions like the integration of Alliance Boots and the expansion via Rite Aid stores, the company has recently grappled with significant financial and operational headwinds. A decade of strategic pivots, including a substantial investment in VillageMD aimed at building an integrated healthcare model, coincided with a dramatic decline in market capitalization, ballooning debt, and increasing competitive pressure from traditional rivals like CVS Health (CVS) and disruptive entrants like Amazon (AMZN) and Walmart (WMT).

The core of $WBA's business remains its vast retail pharmacy network, providing prescription dispensing, health and wellness services, and a wide array of retail products. This physical footprint, coupled with the trusted relationship between pharmacists and patients, is the company's foundational strength. However, the traditional retail pharmacy model has faced mounting pressures from changing consumer behavior, reimbursement challenges, and the rise of e-commerce.

In response, $WBA, under new leadership, is undergoing a fundamental reorientation. The strategic review initiated in fiscal 2024 has led to a clear mandate: simplify the business, focus on the core retail pharmacy strength, and establish a disciplined financial model centered on generating free cash flow and strengthening the balance sheet. This involves a multi-faceted action plan touching every part of the organization, from store operations and technology to strategic partnerships and asset management.

Central to this strategic pivot is the leveraging of operational technology to enhance efficiency and the customer experience. While not a developer of groundbreaking pharmaceuticals or medical devices, $WBA is increasingly relying on technological solutions to optimize its core processes. Micro-fulfillment centers (MFCs), for instance, are being deployed to centralize prescription filling, freeing up pharmacists' time for patient care and clinical services. Currently, 11 MFCs support approximately 4,800 stores, contributing to a 23% year-over-year increase in shipped volumes and a 13% reduction in cost per fill. This operational efficiency is a key differentiator in a low-margin environment. Furthermore, the company is implementing new scheduling optimization logic in stores to better align labor with demand patterns, aiming to improve the in-store experience for both customers and staff. Digital and omnichannel offerings, such as same-day delivery (with approximately 80% of orders delivered within one hour) and virtual care services, are being accelerated to meet evolving consumer preferences and compete in the digital landscape. These technological initiatives, while perhaps less visible than a new drug discovery, are crucial for improving the economic model of the core business and enhancing the competitive moat through operational excellence and customer convenience.

Strategic Pillars and Operational Execution

The strategic review has culminated in a clear action plan built on three principles: simplify and focus, grow in capital-efficient ways leveraging the core, and deliver profitable growth and cash flow. The most visible manifestation of this plan is the Footprint Optimization Program. Recognizing that approximately 25% of its U.S. stores are currently underperforming and not contributing to long-term strategy, $WBA plans to close a significant portion of these, targeting approximately 1,200 to 1,300 closures by the end of fiscal 2027. This builds on prior experience, having closed around 2,000 locations over the past decade. The closures prioritize underperforming, cash flow negative locations and those with near-term lease expirations to mitigate dark rent burden. While involving estimated pre-tax charges of $2.2 billion to $2.4 billion (with ~90% expected cash expenditures), this program is anticipated to be accretive to AOI and cash flow in fiscal 2025, contributing an estimated $100 million in AOI benefit. The goal is to realign to a healthier, more dynamic store base that can better respond to market shifts and close the competitive gap with peers who have undertaken similar initiatives.

Simultaneously, $WBA is overhauling its retail strategy. This includes reevaluating assortment, focusing on fewer national brands and increasing penetration of owned brands (up 75 bps to 17.8% in Q1 FY2025), particularly in health and wellness categories. The aim is to sharpen focus, improve margins, and meet value-seeking consumer behavior. Accelerating digital and omnichannel capabilities, enhancing the loyalty program (over 120 million members), and improving the in-store experience through operational efficiencies and empowered store managers are also key initiatives.

In pharmacy, the focus is on stabilizing margins and defining the future role of the pharmacist. $WBA is actively engaging with payers and PBMs to reframe reimbursement discussions, advocating for fairer value for services and exploring alternative models like cost-plus. While contract negotiations for calendar year 2025 are completed for approximately 80% of volume, securing more favorable terms is an ongoing, multiyear process. The company is also investing in talent development, partnering with pharmacy schools to address labor shortages and advocating for provider status for pharmacists to be reimbursed for clinical services beyond dispensing. Operational improvements, such as optimizing MFCs and implementing digital check-in, are reducing pharmacist workload and improving patient experience, leading to better retention and adherence.

Financial Performance and Health

$WBA's recent financial performance reflects the challenges and the early stages of the turnaround. For the three months ended February 28, 2025 (Q2 FY2025), the company reported sales of $38.59 billion, a 4.1% increase year-over-year (4.7% constant currency). For the six months ended February 28, 2025, sales were $78.05 billion, up 6.3% year-over-year (5.8% constant currency).

GAAP results show significant net losses, primarily driven by non-cash impairment charges. In Q2 FY2025, $WBA reported a net loss attributable to $WBA of $2.85 billion ($3.30 per share), a significant improvement from the $5.91 billion loss ($6.85 per share) in the prior year quarter, which included a large VillageMD goodwill impairment. The current quarter included new non-cash impairment charges totaling $4.2 billion attributable to $WBA (net of tax and non-controlling interest) related to goodwill, intangibles, and other long-lived assets, primarily at U.S. Retail Pharmacy and VillageMD.

Adjusted operating income (AOI), a key measure of segment performance, provides a clearer view of underlying trends. U.S. Retail Pharmacy AOI decreased by 35.2% in Q2 FY2025 to $487 million, reflecting lower retail sales, lower Cencora equity income, and lapping prior year sale-leaseback gains, partially offset by cost savings. International AOI decreased by 4.7% (2.1% constant currency) to $234 million, impacted by cost inflation and technology investments, partly offset by strong retail performance and wholesale growth. U.S. Healthcare continued its trend of improvement, with AOI increasing significantly to $117 million in Q2 FY2025, driven by higher contributions from VillageMD and growth at Shields. The segment also achieved positive Adjusted EBITDA of $158 million in the quarter.

Liquidity and balance sheet strength are paramount. As of February 28, 2025, $WBA had $702 million in cash and cash equivalents, down from $1.32 billion at August 31, 2024. Total debt stood at $8.0 billion, with $1.4 billion classified as current. Significant debt maturities are approaching in fiscal 2026 ($2.8 billion) and 2027 ($1.8 billion). The company has $5.8 billion in revolving credit facility capacity and was in compliance with financial covenants. Cash flow from operations was negative $339 million for the six months ended February 28, 2025, impacted by $1.1 billion in legal settlement payments (including the $595 million Everly settlement) and pension contributions, though this was an improvement from the prior year period.

To bolster liquidity and strengthen the balance sheet, $WBA has aggressively pursued cost reduction (over $1 billion in savings in FY2024), CapEx reduction ($250 million lower in 1H FY2024), and working capital improvements. It is also actively monetizing non-core assets, including selling shares of BrightSpring and accelerating the settlement of variable prepaid forward (VPF) derivative contracts related to Cencora shares, generating proceeds for debt paydown and general corporate purposes. The decision to suspend the quarterly dividend in January 2025 was a direct reflection of the need to conserve cash for litigation, debt refinancing, and funding the turnaround, signaling a shift towards a more pragmatic capital allocation policy.

Competitive Positioning

$WBA operates in a highly competitive and dynamic landscape, facing pressure from multiple angles. Its primary rivals, CVS Health, Walmart, and Amazon, each bring distinct strengths that challenge $WBA's market position.

Compared to CVS Health, the largest U.S. pharmacy retailer, $WBA competes directly across retail pharmacy and increasingly in health services. While $WBA leverages its extensive physical network and aims for cost leadership in generics (achieving potentially 10-15% lower operating cost per prescription through higher generic dispensing), CVS benefits from a more integrated model encompassing a large PBM (Caremark) and health insurance (Aetna), allowing for greater control over the value chain and potentially higher recurring revenue. CVS also generally demonstrates stronger revenue growth and profitability metrics (higher ROIC) than $WBA. $WBA's strategic response involves reframing reimbursement discussions and expanding services to capture more value, aiming to counter CVS's integrated advantage.

Against mass retailers like Walmart, $WBA faces intense price competition. Walmart's massive scale and supply chain efficiency allow for potentially lower costs across its retail offerings. $WBA counters this by focusing on its role as a healthcare destination, leveraging pharmacist expertise and expanding health services, aiming to differentiate beyond price. $WBA's focus on owned brands and optimizing assortment is also a direct response to compete on value.

Amazon represents the digital disruption threat. Its sophisticated e-commerce platform and logistics network enable rapid delivery, challenging $WBA's traditional store-based convenience. Amazon's tech-driven approach allows for efficient order processing. $WBA's response includes accelerating its own digital and omnichannel capabilities, such as same-day delivery and virtual care, and leveraging its physical stores for immediate needs and personalized service that online-only models cannot replicate. $WBA's investment in MFCs and labor optimization technology is crucial to improving its operational efficiency to compete with digital players.

Rite Aid, a smaller regional player, faces even more significant financial distress and is undergoing bankruptcy proceedings. $WBA has historically competed with Rite Aid and has even acquired some of its stores. $WBA's stronger financial position and ongoing optimization efforts position it to potentially capture market share from Rite Aid's closures, further solidifying its regional presence.

$WBA's competitive advantages lie in its vast, trusted physical footprint, its growing operational efficiency through technology like MFCs, and its focus on cost leadership in generics. However, it is vulnerable in digital capabilities compared to tech giants and faces pressure from the integrated models of larger rivals. The strategic reorientation and investment in technology are critical for $WBA to leverage its core strengths and compete effectively in an evolving market.

Outlook and Future Trajectory

$WBA's outlook for fiscal year 2025 reflects a period of transition and stabilization. The company has reaffirmed its adjusted EPS guidance range of $1.40 to $1.80. This guidance is based on key assumptions, including the expectation that the challenging U.S. retail environment will persist, leading to a projected retail comparable sales decline of approximately 4% to 5% for the year. Pharmacy margins are anticipated to remain under pressure, although management expects a lessening of the headwind compared to prior years due to completed 2025 contract negotiations for a significant portion of volume and ongoing discussions for fairer terms.

The guidance incorporates the expected benefits from strategic initiatives, including an estimated $100 million AOI contribution from the Footprint Optimization Program and $500 million in working capital benefits, alongside a $150 million reduction in capital expenditures. These operational improvements are expected to be partially offset by headwinds, notably an estimated $0.75 impact on adjusted EPS from lapping prior year sale-leaseback gains, reduced Cencora equity income (following share sales), and a return to a more normalized adjusted effective tax rate (expected to be under 5% for FY2024).

Growth is anticipated in the U.S. Healthcare and International segments, contributing positively to the overall outlook. U.S. Healthcare is expected to see adjusted EBITDA improve by $250 million at the midpoint in fiscal 2025, reaching a range of $280 million to $350 million, driven by continued progress at VillageMD (focused on core markets and cost reduction) and growth at Shields. The International segment is expected to see profitability growth, led by Boots retail and the Germany wholesale business.

Management views fiscal 2025 as a "rebasing year," focused on disciplined execution against priorities to stabilize the core business and build a solid foundation. The turnaround is acknowledged as a multiyear effort, with the goal of returning to longer-term enterprise growth. Key factors to watch include the successful execution of the Footprint Optimization Program, progress in reframing pharmacy reimbursement, the performance of the retail strategy revamp, and the outcome of efforts to monetize non-core assets like VillageMD.

Risks and Challenges

Despite the clear strategic direction, $WBA faces significant risks and challenges that could impact its turnaround efforts and financial performance.

Macroeconomic headwinds, including inflation and high interest rates, continue to pressure the U.S. consumer, directly impacting retail sales and potentially exacerbating value-seeking and channel-shifting behavior. A weaker-than-expected cough, cold, and flu season can also negatively affect retail performance.

Pharmacy-specific risks include ongoing reimbursement pressure from payers and PBMs, fluctuations in benchmarks like NADAC, and the impact of generic drug dynamics. While management is actively engaged in negotiations, there is no guarantee of achieving sufficiently favorable terms across all contracts, which could continue to weigh on pharmacy margins. The ability to achieve provider status for pharmacists and be reimbursed for expanded services is also subject to regulatory and market adoption.

Operational risks include the successful execution of the Footprint Optimization Program, including minimizing disruption to customers and retaining employees and scripts in receiving stores. The retail strategy revamp, including assortment changes and digital acceleration, must resonate with consumers to drive traffic and sales. Elevated levels of retail shrink also remain a challenge impacting profitability.

Significant legal liabilities related to opioid settlements and ongoing litigation, including the DOJ lawsuit filed in January 2025, continue to require substantial cash payments ($1.1 billion in legal payments in 1H FY2025), impacting operating cash flow and balance sheet flexibility. The $595 million Everly settlement paid in February 2025 is another example of these unpredictable costs.

The performance and valuation of U.S. Healthcare assets, particularly VillageMD, remain uncertain. While management is pursuing monetization options, the timing and value of any sale are not guaranteed, and continued investment in these businesses could be a drain on resources if profitability targets are not met.

Finally, the proposed Merger with Sycamore Partners introduces additional risks, including the possibility that the transaction may not be completed due to failure to satisfy conditions (regulatory approvals, stockholder approval, financing), potential litigation, and restrictions on business conduct during the pendency. If the Merger is terminated, the stock price could decline, and the company may face termination fees. The uncertain value of the Divested Asset Proceed Rights tied to VillageMD monetization also presents a risk for shareholders.

Conclusion

Walgreens Boots Alliance is embarking on a critical multiyear turnaround, strategically reorienting towards its core retail pharmacy business while shedding non-core assets and aggressively pursuing operational efficiencies and cost reductions. The company's long heritage, trusted brand, and extensive physical footprint remain foundational strengths, complemented by investments in operational technology like MFCs and digital capabilities aimed at improving efficiency and customer experience.

While recent financial results reflect the significant challenges and the impact of non-cash impairments, the focus on adjusted profitability, cash flow improvement, and balance sheet strengthening is clear. The reaffirmed FY2025 guidance signals a period of stabilization and rebasing, with expected benefits from footprint optimization and cost savings offsetting ongoing retail and pharmacy headwinds.

The investment thesis hinges on the successful execution of this strategic pivot: stabilizing pharmacy margins through effective payer negotiations, revitalizing the retail business to drive traffic and sales, and unlocking value through asset monetization to reduce debt and improve financial flexibility. The competitive landscape is fierce, demanding continuous adaptation and leveraging $WBA's unique strengths in a capital-efficient manner. For investors, monitoring the tangible progress on these strategic initiatives, the trajectory of cash flow generation, and the outcome of the proposed Merger will be critical indicators of $WBA's potential to achieve a sustainable economic model and deliver long-term value.