While you’ve probably had a consistent experience going to the pharmacies operated by Walgreens Boots Alliance (NASDAQ: WBA) over the years, that doesn’t make it a company that’s in stasis. In fact, within the next three years, there’s a very high chance that it’ll be changing in a handful of ways that are relevant to investors.

But even if the retail experience doesn’t shift much, there’s reason to believe that the stock’s value will continue to deteriorate as a result of what its management plans to do. If all goes well, there could be a brighter future ahead in due time — but that is far from guaranteed.

Here’s a grounded projection for where the stock could be in late 2027.

Will the plan work?

The story of Walgreens’ recent past is a doleful one. Measured by total return, its shares are down by 76% over the past three years, and its quarterly operating income fell a staggering 92% in the same period, slipping to $67 million in its fiscal third quarter (ended May 31).

There’s likely more than one culprit for Walgreens’ operational challenges. Management points to tighter consumer budgets, presumably caused by inflation, as putting downward pressure on revenue in its retail segment. In contrast, its core pharmacy segment in the U.S. — which is to say, the main driver of people to visit its stores — is struggling with declining profitability. This is linked to its reimbursement from insurers bringing in less cash than before, as well as its sale leaseback real estate transactions being less lucrative.

Management sees these headwinds persisting into its next fiscal year, and it is reasonable to expect them to continue beyond that as well, as it has not yet proposed any concrete plan to mitigate them, aside from scaling down somewhat. Over the coming years, it expects to reposition or close 25% of its existing retail footprint. Around $1 billion in cost savings should be realized before the end of this fiscal year. Given that its trailing-12-month operating losses are just over $1.4 billion, that won’t be enough to stabilize the company.

In other words, it is very unlikely that this business will be able to grow its market share or top line anytime soon, as it will have fewer and fewer productive assets to operate. Further losses are likely, even if its operating efficiency improves in keeping with the cost-cutting campaign.

So, at least in the near term, expect it to sell off more of its equity investments to make up for its losses, as it has been doing over the last few years. That will further reduce its total assets, and reduce its financial flexibility to borrow money at an attractive interest rate, as it will have less collateral.

Story continues

On the bright side, Walgreens’ healthcare segment, which delivers treatment direct to consumers, generated adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $23 million for the first time in Q3. Though getting things up and running cost plenty of scarce cash, over the next few quarters it may be a contributor to the bottom line instead of a detractor, which will be a desperately needed change.

Still, as the entire segment only brought in $2.1 billion in the third quarter, barely up at all from a year prior, it won’t be enough to carry the company’s shares aloft by much, if at all.

Check back in three years

Given how things are looking right now, the smart expectation for 2027 is for Walgreens to be a much smaller and somewhat more efficient operator that doesn’t really have any way of growing beyond its diminished state.

And, with $33.6 billion in debt, it may well have to further liquidate assets and dramatically curb its expenses by even more than it has planned to do so far. Over the last 12 months, it repaid $26.8 billion in debt while issuing $24.1 billion more. If it continues to deleverage at roughly the same rate moving forward, it will be many years before it reaches a more sustainable debt burden. And that’s a long-term impediment to growth, as well as to returning capital to shareholders.

In a best-case scenario, the company will be producing enough earnings in late 2027 to gear up for another growth push in the years after that, but it’s hard to know which segments it’ll be targeting or how effective its attempt will be given its diminished state. It is not at all certain that it will be in a better situation three years from now. Therefore, Walgreens is not a stock you should invest in today.

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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Where Will Walgreens Boots Alliance Be in 3 Years? was originally published by The Motley Fool