Walgreen Surges on CEO Retirement: What Wall Street's Saying

NEW YORK (TheStreet) -- Walgreen  (WAG) shares surged on news that CEO Greg Wasson will retire later this month ahead of the completion of the drugstore chain's merger with Alliance Boots.

Wasson informed the Deerfield, Ill.-based company's board that he will retire shortly after the shareholder vote on the merger with the U.K.'s largest drugstore chain, scheduled for Dec. 29, the company said in a press release late Wednesday.

Stefano Pessina, executive chairman of Alliance Boots, will serve as the company's acting CEO following the merger's close. Walgreen Chairman James Skinner will become executive chairman of the combined company. The merger is expected to be completed in the first quarter.

Walgreen shares were surging 4.5% to $71.28 on Thursday. Here's what analysts said.

George Hill, Deutsche Bank (Buy; $69 PT)

We suspect the news of Wasson's departure will be viewed as a modest positive by investors. Wasson presided over several high-profile controversies during his tenure, including the dispute with Express Scripts, the chronic underperformance of the retail business relative to CVS, and the recent miscommunication of underlying business performance as it related to the merger with AllianceBoots. While we do not believe that Wasson's departure is tied to another negative earnings revision, the circumstances have a timing and feel similar to the departure of former CFO Wade Miquelon prior to the August 6 preannouncement. Thus, some investor caution is warranted.

We maintain our Buy rating on WAG shares and adjust our price target to $69 reflecting 15x our C2016 EPS estimate of $4.60. We believe there is the potential for earnings estimates to increase if management has overestimated the long-term margin pressure or increases cost savings. The key risks for WAG shares are reimbursement pressure, competitive environment, or if synergy benefits from the AB and ABC deals do not perform to expectations.


Ajay Jain, Cantor Fitzgerald (Hold; $56 PT)

While we had anticipated that the Alliance Boots leadership team would continue to exercise more control over the combined entity upon consummation of the merger, we think the timing of the latest announcement is abrupt and caps off a tumultuous period for Walgreen.

We think some investors will applaud the accelerated timeframe from which the old guard at Walgreen is leaving and paving the way for the Alliance Boots management to exercise more direct oversight over the combined operations. However, we caution against getting too carried away. The updated guidance for Walgreens Boots Alliance has significant information gaps and remains aggressive, in our view. FY:15 has already been telegraphed to be a very challenging year for Walgreen based in part on Medicare D margin pressures.

Mark Wiltamuth, Jefferies (Buy; $67 PT)

We expect a positive market reaction: While Walgreens has experienced a 125%+ stock return during Mr. Wasson's tenure, we believe the market will view this transition favorably. Walgreens is undergoing a change into a global company and investors have been clamoring for Stefano Pessina to play a greater role in running the combined entity. Alliance Boots executives are already slated to move into the major operational roles at Walgreens and this step further clears the way for new leadership. While Mr. Pessina will assume the title of acting CEO in the near term, we expect the soon-to-be top shareholder to eventually play a primary role in selecting the next permanent leader for the company.

Focus remains on long-term margin potential: In the wake of the 22% EBITDA guidedown for F2016, investors are focused on steps the company can take to improve the performance of core Walgreen US operations. With a 3.8% EBIT margin gap vs. CVS and 6.0% vs. the UK Boots retail stores, management is focusing on $1B+ in merger synergies, an incremental $1B cost reduction program and a broader 3-5 year push to improve the overall margin structure. We believe that no matter who the new CEO ultimately is, improving Walgreen's profitability is where the longer-term opportunity lies for the company.

Alvin Concepcion, Citigroup (Buy; $80 PT)

We view this as a positive announcement. Confidence in the management team was shaken after their downward revision of guidance in August, and news of Mr. Pessina taking on the role may relieve some investor uncertainty and concern about who will lead the strategic direction of the company. Importantly, we spoke with the company and they mentioned that the move was not at all prompted by financial matters or the lawsuit with the former CFO. The timing of the announcement now vs. after 12/23 earnings was to provide more transparency to shareholders ahead of the vote on 12/29. Therefore our confidence that the company will be able to achieve our FY16 estimate is unchanged, and we still view the growth story as under-appreciated. Shares are indicating up ~3% in the after-market.

Mr. Pessina owns ~8% of WAG shares currently (16% post the deal), and is also its largest individual shareholder. Therefore, we think his interests will be very aligned with shareholders. He is also generally well regarded by many investors due to his success at Alliance Boots, and is highly focused on costs. We note that Mr. Pessina has stated previously that he is not interested in being a permanent CEO given his preference for leading the strategic direction of the company vs. running day to day operations. Therefore, the company is conducting a search for a permanent CEO.

Lisa Gill, JPMorgan (Overweight)

Recall that Mr. Wasson had been named as President and CEO of the combined company in August 2014. It is unclear what drove the change just over four months later. We note that the Board and Mr. Wasson could have decided that the combined company would benefit from a CEO with more international experience given the global footprint of the combined entity. However, we also wouldn't rule out the potential that Mr. Wasson and the Board could not reach agreement around issues such as the overall strategy, M&A or leverage.

We have a high degree of confidence in Mr. Pessina's broader vision of engineering a transformational shift in the global pharmaceutical supply chain, and point to his strong track record in building the Alliance Boots business. In our view, he has assembled a strong management team that, under his direction, has executed very well on this strategy.

TheStreet Ratings team rates WALGREEN CO as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate WALGREEN CO (WAG) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, good cash flow from operations and solid stock price performance. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • WAG's revenue growth has slightly outpaced the industry average of 0.9%. Since the same quarter one year prior, revenues slightly increased by 6.2%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • WAG's debt-to-equity ratio is very low at 0.24 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Despite the fact that WAG's debt-to-equity ratio is low, the quick ratio, which is currently 0.66, displays a potential problem in covering short-term cash needs.
  • Net operating cash flow has increased to $1,384.00 million or 23.24% when compared to the same quarter last year. Despite an increase in cash flow, WALGREEN CO's cash flow growth rate is still lower than the industry average growth rate of 49.58%.
  • WALGREEN CO has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has suffered a declining pattern of earnings per share over the past two years. However, we anticipate this trend to reverse over the coming year. During the past fiscal year, WALGREEN CO reported lower earnings of $2.00 versus $2.56 in the prior year. This year, the market expects an improvement in earnings ($3.57 versus $2.00).
  • Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. The stock's price rise over the last year has driven it to a level which is somewhat expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.

- Written by Laurie Kulikowski in New York.

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