The earnings calendar is light this week, making it a bad week for a company that may disappoint investors.
That’s exactly where Walgreens Boots Alliance (WBA) stands.
The company is set to report its quarterly results on Thursday, June 27, before the market opens, and shares are in a familiar pattern in a long trend.
Walgreens is one of those retailers that’s been caught between a rock and a hard place.
For years, the company flourished as a hybrid pharmacy/retail store.
Consumers would go in for their prescriptions and other sundries and then load up on everything from snacks to drinks to gifts and seasonal items.
The model started breaking a few years ago as Walmart, Kroger, and other larger retailers expanded the reach of their pharmacies, taking share from both CVS and Walgreens.
Similarly, the company’s foray into health clinics by purchasing VillageMD in 2021 was quickly met with pressure from those same larger retailers.
That resulted in the closure of hundreds of clinics and the charge-off of more than $5 billion for Walgreens.
To top everything else off, the company continues to get increasingly squeezed by reimbursement pricing pressure and the entry of new large-scale competitors in the pharmacy business like Amazon.
The company comes into this week’s earnings report in a critical position.
Wall Street analysts haven’t changed their long-term posture on the stock in more than 18 months, but that may soon change.
Lower revenue and higher debt are now combining with the company’s lackluster performance, the pressure of which is likely to cause another negative swing in sentiment.
Those sentiment swings are almost always accompanied by renewed long-term selling as Wall Street gives up on the stock.
Last quarter’s earnings showed growth of 6% over last year.
This quarter’s expectations are for 4.9%.
The fact that consumers have been pulling back on spending due to inflation and economic fears means that there may be a higher risk of Walgreens missing that number.
From Walgreens’ stock chart perspective, a bad earnings report will be much more costly than usual.
An earnings miss could set the stock up for as much as 50% losses over the next three months.
I know that sounds extreme, but here’s why.
Last quarter, the stock traded in a similar pattern ahead of its earnings.
Shares traded in a tight range in the weeks leading up to the announcement, creating a low-volatility environment.
These situations can be dangerous because it indicates that investors are taking a “wait-and-see” approach towards the stock.
It’s a sign that investors don’t have enough faith to either buy or sell the stock.
That lack of faith means that the earnings report will be the single catalyst for the stock’s move.
And in its current state, the stock’s chart shows a lot more downside risk than upside potential.
The recent pre-earnings trading range has tightened its grip on $16.
Shares have traded just below this price since the beginning of June, just after the stock bounced off its lows just below $15.
That’s the price that investors must worry about.
A poor earnings report will drop shares of Walgreens more than the 6% necessary to break below its May lows – the lowest prices that the stock has seen since 2009 – igniting a new selling spree that will be driven by analyst downgrades and institutional selling.
As of today, 60% of the outstanding shares are still held by institutions.
That pressure will target the $10 price as the next price of long-term support, approximately 38% lower than today’s current price.
How do you trade this?
Walgreens bulls need to take heed of this warning.
While it is not out of the question that WBA stock could post a long-term turnaround, the intermediate-term retail environment and stock chart suggest that there is a higher likelihood that the stock will trade to $10 before it sees $20.
The risk of another 40% decline is a sign that there are better investments for the time being.
Short-term traders may consider looking at Walgreens Boots Alliance puts.
Always remember that the risks of trading puts ahead of earnings are much larger than any other time on the calendar.
That said, the September 22, 2024, WBA $15 puts trade for less than a dollar and provide almost 90 days of protection against the stock dropping below $15.
At their current price, these puts offer an attractive vehicle to leverage Walgreens Boots Alliance’s potential target of $10.
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.