Executive Summary / Key Takeaways

• Walgreens Boots Alliance is undergoing a significant multiyear turnaround, reorienting to its core retail pharmacy strength and focusing on operational efficiency and balance sheet improvement.
• The company is executing a comprehensive Footprint Optimization Program, planning to close 1,200-1,300 underperforming U.S. stores by fiscal 2027, aiming for positive cash contribution and AOI benefits from these closures.
• Strategic initiatives are underway to stabilize pharmacy margins through reframed payer/PBM negotiations and enhance the retail experience via assortment optimization, own brands, and accelerated omnichannel capabilities, supported by investments in technology like Micro-fulfillment Centers.
• The U.S. Healthcare segment is showing improved performance, achieving positive adjusted EBITDA, and the company is actively pursuing the monetization of non-core assets like VillageMD to reduce debt and enhance financial flexibility.
• The pending acquisition by Sycamore Partners, expected to close in calendar year 2025, offers a path to execute the turnaround as a private company, potentially allowing for more flexibility away from public market pressures, though the value of the Divested Asset Proceed Rights remains uncertain.

Walgreens Boots Alliance, Inc. (NASDAQ:WBA) stands at a pivotal juncture in its long history. With roots tracing back 175 years, the company has evolved from a traditional drugstore into an integrated healthcare, pharmacy, and retail leader. For nearly a century, it has operated as a publicly traded entity, a chapter expected to close with a pending transaction that aims to redefine its future. This transformation is a direct response to a challenging operating environment marked by shifting consumer behaviors, intense competition, and evolving healthcare economics. Under new leadership, WBA has embarked on a multiyear turnaround plan, leveraging its foundational strengths – a vast retail footprint, deep consumer trust, and a dedicated workforce – to navigate headwinds and forge a path toward sustainable growth and profitability.

The company's strategic review, initiated in fiscal 2024, has culminated in a clear mandate: simplify, focus, and build upon the core retail pharmacy business while enhancing financial discipline. This involves a critical assessment of its asset portfolio, a rigorous approach to cost management, and a strategic re-evaluation of its market positioning. The goal is to create a more agile and capital-efficient organization capable of thriving in the dynamic healthcare landscape.

Central to WBA's operational strategy is the optimization of its physical footprint and the modernization of its retail and pharmacy operations. Recognizing that not all locations contribute equally to profitability, the company has launched an expanded Footprint Optimization Program. This initiative targets the closure of approximately 1,200 to 1,300 underperforming stores across the U.S. by the end of fiscal 2027, including around 500 in fiscal 2025. Management anticipates these closures will yield positive cash flow benefits exceeding the associated costs and contribute approximately $100 million in AOI benefit in fiscal 2025. This strategic realignment aims to concentrate resources on a healthier store base, enabling more targeted investments and a better response to evolving consumer preferences.

Complementing the footprint strategy is a multifaceted plan to enhance the customer and patient experience. In retail, WBA is re-evaluating its assortment, focusing on relevancy and deepening partnerships with fewer national brands while significantly expanding its own-brand penetration, which reached over 17% in fiscal 2024 and saw a 75 basis point increase in Q1 2025. The company plans to launch over 300 new owned brand SKUs in fiscal 2025, particularly in high-potential areas like health and wellness and women's health. Simultaneously, WBA is accelerating its digital and omnichannel offerings, with same-day delivery orders frequently fulfilled within an hour, and is investing in its loyalty program to better engage its extensive customer base.

On the pharmacy front, WBA is actively working to stabilize margins amidst ongoing reimbursement pressures. This involves reframing discussions with PBMs and payers to ensure fair compensation for the value provided, including services beyond dispensing. While a multiyear process, management reports constructive conversations and expects incremental steps toward reducing reimbursement pressure in fiscal 2025, having visibility into approximately 80% of the anticipated contract volume for calendar year 2025. The company is also focused on becoming a market leader in drug procurement and is engaging with partners like Cencora (COR) to enhance its cost structure.

Technological advancements play a crucial role in WBA's operational efficiency and service delivery. The company has invested in Micro-fulfillment Centers (MFCs) to streamline prescription processing and free up pharmacists for higher-value clinical activities. These MFCs currently serve about 4,800 stores, with shipped volumes up 23% year over year and cost to fill down by 13%. WBA plans to expand the MFC network to service closer to 6,000 stores over the next 12 months, aiming to further lower operating costs per script and enhance the pharmacist's role in patient care. Additionally, the company is piloting digital and virtual check-in for pharmacy patients in 100 stores, a technology designed to improve the in-store experience by reducing wait times and allowing patients to shop while waiting. While the company previously abandoned certain multi-year internal software development projects, incurring impairment charges, the focus has shifted to modernizing existing systems in a more agile and capital-efficient manner. These technological initiatives are intended to improve efficiency, enhance the patient experience, and support the strategic shift towards a more service-oriented pharmacy model.

Financially, WBA has faced significant challenges, reflected in recent performance. For the nine months ended May 31, 2025, the company reported a net loss of $3.3 billion, heavily impacted by non-cash impairment charges totaling $5.43 billion related to goodwill, intangibles, and long-lived assets, primarily in the U.S. Retail Pharmacy and VillageMD segments. Operating loss for the same period was $5.8 billion. Adjusted operating income for the nine months ended May 31, 2025, decreased by 34.4% year-over-year to $1.94 billion, reflecting lower U.S. retail sales, higher incentive accruals, lower equity earnings in Cencora, and the absence of prior year sale-leaseback gains, partly offset by cost savings and U.S. Healthcare growth.

Despite these pressures, there are signs of operational improvement and a focus on balance sheet health. The U.S. Healthcare segment, which includes VillageMD, Shields, and CareCentrix, achieved positive adjusted EBITDA in recent quarters and is expected to improve by $250 million at the midpoint in fiscal 2025, reaching a range of $280 million to $350 million. Shields, in particular, continues to demonstrate strong growth. The company has prioritized cash flow generation, achieving positive free cash flow in Q4 2024 and for the full fiscal year, driven by working capital initiatives ($500 million benefit in FY24), reduced capital expenditures ($736 million reduction in FY24), and lower legal payments in the latter half of the year. WBA reduced its net debt by $1.9 billion and lease obligations by over $1 billion in fiscal 2024. As of May 31, 2025, total debt stood at $7.37 billion, with $1.80 billion and $846 million maturing in fiscal 2026 and 2027, respectively. To conserve cash and accelerate debt reduction, the company suspended its quarterly cash dividend in January 2025.

WBA operates in a highly competitive landscape dominated by large, diversified players like CVS Health (CVS), mass retailers with pharmacy operations like Walmart (WMT), and increasingly, e-commerce giants like Amazon (AMZN). CVS, with its integrated model encompassing pharmacy, insurance (Aetna), and clinics, poses a significant competitive threat, demonstrating stronger revenue growth and leveraging its scale and vertical integration for efficiency. Walmart competes primarily on price and convenience through its vast retail footprint, while Amazon disrupts with its digital-first approach and logistics capabilities, offering speed and ease of access.

Against these rivals, WBA's competitive advantages lie in its extensive physical network, fostering deep customer trust and providing convenient access for pharmacy and health services. Its focus on cost leadership through initiatives like the Footprint Optimization Program aims to improve operating leverage. Furthermore, its position as a large, independent pharmacy partner is seen as a strength in working with various payers and pharma companies. However, WBA faces disadvantages, including a historical lag in technological innovation compared to Amazon and CVS, and the lack of its own PBM, which can create reimbursement pressures compared to vertically integrated competitors. The company's strategy to re-evaluate its retail offering, invest in omnichannel, and enhance pharmacy services is a direct response to these competitive pressures, aiming to differentiate through a focused health and wellness experience and leveraging its unique community presence.

The outlook for WBA in fiscal 2025 reflects a period of transition and focused execution. The adjusted EPS guidance of $1.40 to $1.80 signals a year impacted by the lapping of prior financial benefits and continued market headwinds, even as operational improvements are expected to take hold. Key assumptions include ongoing pressure on pharmacy reimbursement (though lessened compared to prior years), a challenging U.S. retail environment with declining comparable sales (projected -4% to -5% in FY25), and expected growth in the U.S. Healthcare and International segments. The company expects to continue generating positive free cash flow in FY25, driven by working capital initiatives ($500 million) and CapEx reductions ($150 million).

A defining element of WBA's near-term future is the pending acquisition by affiliates of Sycamore Partners, announced in March 2025. The transaction, valued up to $23.7 billion including debt, offers shareholders $11.45 in cash per share plus a Divested Asset Proceed Right tied to the future monetization of VillageMD assets (up to $3 per DAP Right). Expected to close in the latter half of calendar year 2025, this move will take WBA private, a strategic shift that management and analysts suggest could provide the necessary flexibility and time to execute the complex turnaround plan away from the pressures of quarterly public reporting.

Conclusion

Walgreens Boots Alliance is actively engaged in a critical turnaround effort aimed at stabilizing its core retail pharmacy business, improving its financial health, and adapting to a rapidly evolving healthcare market. The strategic decisions to optimize its store footprint, reframe pharmacy economics, enhance the retail offering, and monetize non-core assets are foundational to this transformation. While recent financial performance reflects the significant challenges and costs associated with this transition, including substantial impairment charges and ongoing market pressures, there are tangible signs of progress in cost management, cash flow generation, and segment-specific improvements, particularly in U.S. Healthcare. The pending transaction to become a private company under Sycamore Partners is poised to be a catalyst, potentially enabling a more focused and long-term approach to executing the turnaround strategy. For investors, the story is one of a legacy company undertaking a necessary reinvention, leveraging its core strengths and technological advancements to navigate a competitive landscape, with the private ownership structure potentially facilitating the path to future value creation, albeit with inherent execution risks and the uncertainty surrounding the value of the Divested Asset Proceed Rights.