Walgreens' junk bonds among biggest decliners in high-yield market after earnings disappoint

By Ciara Linnane

Spreads on Walgreens bonds widen sharply as stock tumbles to 27-year low

Junk bonds issued by Walgreens Boots Alliance Inc. were among the biggest decliners in the high-yield market on Thursday, swept up in the downdraft of a stock that was trading at a 27-year low.

Walgreens' (WBA) 4.8% bond that matures in 2044 was down 1.44 cents to 82 cents on the dollar early Thursday, pushing its yield up to 6.4%, according to a market source.

"The bond market reaction has been severe and I believe is moving in sympathy with the stock," said Carol Levenson, director of research at GimmeCredit. "The actual credit profile has not changed appreciably with today's announcement (which was incredibly vague), at least not in our view."

The bonds are rated at Ba2 by Moody's Investors Service and BBB-minus by S&P Global Ratings. The former is below investment trade, while the latter is the final rung of investment grade, which makes Walgreens a crossover credit, or one with a split rating.

"It's long overdue for a downgrade to straight junk," said Levenson, who noted how pricey the bonds were and still are, even after Thursday's correction.

GimmeCredit has an underperform rating on the bonds and a deteriorating credit score on Walgreens. Last month, the research company placed the credit into its Bottom Ten list, she said.

The move came after the drugstore chain reported fiscal third-quarter earnings that fell short of expectations and led the company to lower its full-year profit guidance.

Chief Executive Tim Wentworth cited a still-stressed consumer who is counting pennies and pressures on pharmacy margins amid a slump in prescriptions.

"Our customers have become increasingly selective and price-sensitive in their purchases," Wentworth said on the earnings call.

The company is finalizing a multiyear program that will see it close underperforming U.S. stores, upgrade its pharmacy customer and patient experience and seek better terms from pharmacy-benefit managers, who negotiate drug prices for insurers and employers.

For now, 75% of its U.S. stores contribute about 100% of segment AOI, or adjusted operating income. Many of the remaining 25% are not contributing, and a significant number will be closed in the next three years, he said.

Walgreens has more than 8,700 retail outlets in the U.S.

"For the remaining portion of this cohort, we are taking action to return them to profitability and deliver an improved customer experience. We will contemplate additional closures if performance does not improve, which includes external factors such as reimbursement rates," he said.

Spreads on Walgreens' high-yield bonds widened sharply on the news, as the following chart from data solutions provider BondCliQ Media Services shows. Spread is the extra compensation investors demand for taking on the additional risk of corporate bonds.

Prices on the bonds fell sharply, pushing yields higher.

Walgreens has almost $7 billion in outstanding bonds, according to FactSet. Some $1.5 billion worth matures this year, and another $1.4 billion will come due in 2026.

The stock, meanwhile, was down 25% at $11.74, levels not seen since 1997.

Jeff Jonas of Gabelli Funds said the share move was "deserved."

"I have a hard time seeing how they turn this business around.," he said in emailed comments. "The front of the store is in structural decline as people shop online and at big box stores like Costco (COST) and Walmart (WMT). I don't see that traffic or business turning around anytime soon."

-Ciara Linnane

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

06-27-24 1351ET

Copyright (c) 2024 Dow Jones & Company, Inc.