S&P International Scores downgrades Walgreens, citing struggles in each pharmacy and retail

Take heed to the article
4 min

This audio is auto-generated. Please tell us you probably have suggestions.

S&P International Scores analysts have downgraded Walgreens Boot Alliance by two notches, to ‘BB’ from ‘BBB-‘, which places the pharmacy firm into speculative-grade territory.

Analysts Diya Iyer and Hanna Zhang cited steering for the 12 months “notably under” their expectations, and stated “materials strategic adjustments, restricted money stream technology, and enormous maturities in coming years are key dangers to the enterprise.”

The corporate is struggling in its retail enterprise in addition to its pharmacy operations, they stated in a Friday shopper word. Within the U.S., margins are taking a success on the pharmacy facet from reimbursement strain and on the retail facet from declining gross sales quantity and better shrink. They count on Walgreens’ S&P International Scores-adjusted EBITDA margin to say no greater than 100 foundation factors this fiscal 12 months, dipping under 5%, from 6% final 12 months, although the corporate’s price cuts will counter that considerably.

Walgreens’ debt and its must refinance a lot of IT signify one other “key danger,” they stated. This November, Walgreens faces $1.4 billion in maturities, principally U.S. bonds. One other $2.8 billion comes due in fiscal 2026 and $1.8 billion in fiscal 2027. The analysts referred to as Walgreens’ transfer to consolidate money “prudent” in case refinancing isn’t potential.

“We will probably be monitoring how Walgreens’ new administration addresses this massive debt load intently amid its persistently weak efficiency and better rates of interest,” Iyer and Zhang stated.

Past these monetary realities, although, are strategic weaknesses. Ex-Cigna govt Tim Wentworth took over as CEO final fall and this 12 months has overseen a strategic evaluate that has entailed extra layoffs and store closures.

Walgreens has additionally upended a few of its plans to develop its medical care operations, divesting of or shrinking lots of its authentic investments and plans. Final month, for instance, the corporate introduced IT would cut back its stake in value-based medical chain VillageMD, saying IT will not be the corporate’s majority proprietor, after closing dozens of the clinics final 12 months. The corporate first poured $1 billion into VillageMD in 2020 and greater than doubled its stake for an additional $5.2 billion the next 12 months, however the banner’s waning worth helped drive a $6 billion loss in Q2.

Regardless of such strikes, Iyer and Zhang stated they proceed to see the VillageMD banner as “a big drag on profitability because of the rising price of labor, pressures from reimbursement, and decrease volumes.”

Walgreens’ acquisition streak led the S&P analysts to consider that IT would divest of its Boots U.Okay. enterprise, which might have helped pay down $8 billion to $10 billion in debt. However the firm called off the idea about two years in the past.

“We consider these frequent and enormous adjustments to the corporate’s strategic plans diminish administration’s credibility to execute on a sustainable and cohesive working mannequin for Walgreens in each the close to and long run,” Iyer and Zhang stated.

Beneficial properties that Walgreens has managed to eke from its medical operations haven’t managed to offset declines on the retail stated, in addition they stated, including that they’re intently watching what IT does subsequent with its large footprint. The corporate final 12 months introduced that IT would close 150 stores in the U.S. and 300 within the U.Okay. and simply final month stated IT was reviewing 25% of its present footprint, with plans to shutter a “good portion” of its roughly 8,700 shops.

“Our scores proceed to mirror Walgreens’ massive scale and its efforts to handle its credit score metric profile. With nearly $140 billion in gross sales in fiscal 2023 and a various array of world companies, Walgreens stays distinguished within the drugstore house,” they stated. “Nevertheless, we expect its scale is offering much less safety to profitability at the least partly on account of inconsistent strategic course.”