It’s been a horrible couple of years for Walgreens Boots Alliance (WBA).
I never really considered the stores a “retail store” in the sense that I went there to buy anything outside of Band-Aids, Tylenol, sunscreen, and maybe an Ace Bandage here and there.
On a sidenote, I buy all of that from Costco (COST) now - and I bet you do too.
The one thing that has served the company well over the last decade has been their pharmacy service.
The helpful advice from the pharmacist, the beacon in the night that was open 24 hours when your doctor phones in a late-night prescription. All of that served as the foundation for what was left as a business model.
Gone.
That’s right, it’s gone.
Yesterday, Amazon (AMZN) announced that they are breaking into the immediate delivery pharmacy market.
The company is going to start with a few test markets, including New York City and Los Angeles.
(P.S. why do they get to try all the cool things?)
From there, the company will expand services to other markets.
The move delivers a blow to the likes of Walgreens and CVS (CVS), both of which have been struggling with righting their stocks, but the real risk is with shares of WBA over the next few weeks.
Walgreens is set to announce their quarterly results tomorrow morning (March 28).
The company’s stock sits in a technical must-win situation to avoid what is likely to be a relatively fast trip to $15.
That would be a 25% decline.
My Recent Walk Down Main Street on Walgreens
It was a disappointing walk.
I visited a store in Frisco Colorado last month. If you know the area, there’s not much in the way of retail and pharmacy.
This Walgreens should have been buzzing. But it wasn’t.
The store, located in a nice section of town, was left unkempt, lacked inventory (empty shelf space), and the inventory that was there missed the market.
You know what was in good order, organized, and stocked as well as busy with customers? The Walmart (WMT) pharmacy just a few doors down.
Sure, we could be dealing with a one-off situation, but I’ll say that my experience has been similar in every Walgreens I can remember over the last few years.
The experience at the store reflects the company’s management at this level.
So How Does That Translate to the Stock?
Revenue for the company has been stubbornly low on its growth.
We’ve seen the year-over-year comps bounce between +9% and -6% for the last two years. Earnings per share (EPS) have been on a consistent decline since January 2022.
The fundamental metrics for the stock reflect my Walk Down Main Street experience.
So, it’s all up to the chart on this earnings call, which is where the real risk lies.
Currently, shares of WBA hover just above the $20 level. They’ve been sitting there for the last month.
The price has started a decline into the earnings announcement, telling you and I that the stock has no room for error here. Traders and investors aren’t looking to hold through earnings on the hope that a good report will buoy shares, they’re tired of this bear market trend.
Which brings me to the make-or-break point.
Heading into the report tomorrow, the stock has been relatively quiet – from a volatility perspective – which means we’re likely to see a “volatility storm” move prices 5-10% in reaction to the number.
The downside risks are extreme here, as a break below $20 will represent a psychological hit to shares. We haven’t seen the stock break $20 since 2009, and when it did happen then, the stock was in a long-term bull market trend emerging from prices under $10.
The reverse is true today.
A break of this $20 price will target $15 over the short-term and then $10 over the longer term.
The “opportunity” here is for those willing to speculate the downside potential using options.
Please don’t short a stock like this using margin. I’ve done it myself, and as a result, I’ve got a rule against it after my experiences.
We’ll share those one day soon.
My Bottom Line
I’m heading into the Walgreens earnings report with a short-term put option on the stock. The downside risks far outweigh the upside potential.
My Walk Down Main Street analysis of the stock suggests that we’re not likely to see any material improvements in the company’s operational performance.
As a result, the price chart suggests that long-term investors are likely to sell the stock at $20 while the shorter-term traders will aggressively sell or short the stock at the same price.
My target price sits at $15.
Enjoy the call!
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.