Walgreens outlook downgraded to negative by Moody's Ratings
Investing.com -- Moody's (NYSE: MCO ) Ratings has revised the outlook of Walgreens Boots Alliance, Inc. (NASDAQ: WBA ) and its subsidiary Walgreen Co . from stable to negative. Despite this, Moody's has affirmed WBA's corporate family rating at Ba3, its probability of default rating at Ba3-PD, and its senior unsecured notes ratings at B1. The company's backed commercial paper program rating remains at Not Prime and its speculative grade liquidity rating is unchanged at SGL-2.
The adjustment to a negative outlook is driven by the high execution risks involved in Walgreens' multi-year turnaround strategy. The company aims to return to profitable growth despite ongoing operational challenges. These include a weak consumer environment, ongoing legal disputes that could result in substantial liability payments, a plan to close up to 14% of its underperforming stores by 2027, constant inflation, and reimbursement rate pressure.
While Walgreens has seen an improvement in leverage due to debt repayment and modest EBITDA growth, its interest coverage remains weak. Moody's expects the company to have negative free cash flow over the next 12 months, even after the recent suspension of the company's dividend and reduced capital spending. As of November 30, 2024, Walgreens' debt/EBITDA ratio, including the present value of the opioid liability, was high at 5.5x, down from 6.0x in fiscal 2024.
The affirmation of the ratings is a reflection of Walgreens' efforts to preserve free cash flow and reduce debt. The company has suspended its dividend, reduced capital spending, and pre-settled several of its variable prepaid contracts. The proceeds from these contracts will be used to repay debt. The company's good liquidity, focus on debt repayment, and the expectation that its operating performance and metrics will improve over the next 12 months also contributed to the affirmation of the ratings.
Walgreens' Ba3 corporate family rating reflects its large scale and leading market position as the second-largest pharmacy chain in the US. The rating is supported by the company's good liquidity and commitment to repaying debt. The company recently pre-settled several of its variable prepaid contracts for $300 million, the proceeds of which will be used to repay debt. However, Walgreens faces significant execution risks in its turnaround strategy, particularly with its plan to close up to 14% of its underperforming stores.
The SGL-2 rating reflects Walgreens' good liquidity, supported by its $5.75 billion in fully available revolving credit facilities and $1.2 billion of unrestricted cash as of November 30, 2024. The company also has a large pool of unencumbered assets.
An upgrade in ratings could occur if Walgreens' strategic review results in a significant improvement in profitability, leading to an improvement in credit metrics and consistently positive free cash flow. The company would also need to maintain good liquidity and address its upcoming maturities promptly.
On the other hand, ratings could be downgraded if Walgreens' strategic review does not result in steady operational improvement leading to stronger credit metrics and sustained positive free cash flow. A downgrade could also occur if liquidity weakens, financial policies become more aggressive, or if the company fails to address its upcoming debt maturities promptly.
Walgreens Boots Alliance, Inc. is a global retail pharmacy operator with a presence in over 8 countries and more than 12,500 locations. The company generated about $150 billion in annual revenue and $6.4 billion of EBITDA for the last twelve months ended November 30, 2024.
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