Walgreens (WGA) needs a buyer like Amazon or CVS to avoid bankruptcy

Walgreens stock dropped after posting earnings 6-27-2023 to a 10 year low – what caused this?

Walgreens profit declined 20% and its liabilities grew at double the rate that its assets did this quarter. Over the last 5 years the trend was the opposite for Walgreens – they roughly grew their assets at double the rate of their liabilities.

Walgreen’s will have to lower its dividend

A 20% decline in profit means that Walgreens will either have to cut enough costs to keep paying out to share holders or more likely cut it’s 6% dividend by at least 1%. This loss of earnings is why Walgreen’s shares went so low dropping ~9.5% in one day but it might not be done dropping. Even if Walgreens doesn’t lose more profitability; the dividend will in the short term be impacted to the tune of 20%+ depending on worsening economic conditions and shares could keep dropping.

Walgreens financial position is precarious

Walgreens can’t raise capital to reposition, interest rates are too high and their outstanding liabilities have grown substantially over the last 5 years. In 2018 Walgreens had a liability to asset ratio of 60% (41.44B liabilities to 68.12B assets) and in 2023 it has now increased to 66% (59.72B liabilities to 90.12B assets). This mix towards debt has also come at the worst time, the fed just signal that they may not be done raising interest rates and consumers are likely to keep pulling back.

Walgreens is planning major cost cutting in response, they are closing hundreds of stores in the UK and laying off 10% of their corporate staff. Walgreens might be doing this to fix its financials but it also might be reading itself for a sale after it has already declined 30% in the trailing 12M.

Walgreen’s core business is in trouble

On the earnings call Walgreen’s attributed the decline in profit to a reduction in demand for COVID services and consumer pullback. Consumers are not pulling back evenly – Walgreens doesn’t have the right mix of inventory and locations to recapture what they have lost.

Walgreen’s leadership is MIA and an acquisition is likely all that can save it

Walgreens need a step changes in foot traffic that an Amazon could provide or a competitive healthcare acquisition like CVS could work. Walgreens executives highlighted improvements in pharmacy hiring and mostly blamed tough economic conditions for the lack of growth. This means Walgreen’s executives are not doing much more than keeping the lights on – they don’t have a feasible pivot and they are bogged down focusing on operational issues.