Walgreens Q3 Earnings Top Estimates, Stock Up, Gross Margin Declines

Walgreens Boots Alliance (WBA) reported fiscal Q3 2025 adjusted EPS of $0.38, surpassing estimates despite a nearly 40% year-over-year decline, on sales of $38.99 billion, which grew 7.2% and also beat consensus. The company's gross margin, however, contracted 108 basis points to 16.7%. Notably, WBA withdrew its fiscal 2025 guidance given the pending acquisition by Sycamore Partners, a deal expected to close by Q4 2025 that will take the company private.

Analysis

Walgreens Boots Alliance (WBA) reported mixed fiscal Q3 2025 results, characterized by a top-line beat but severe margin and profit erosion. Total sales grew 7.2% year-over-year to $38.99 billion, surpassing consensus estimates by 6.5%, driven largely by a 14.6% increase in U.S. comparable pharmacy sales fueled by branded drug inflation. However, adjusted EPS fell nearly 40% to $0.38, and a GAAP loss per share of 20 cents was recorded. The core operational weakness is evident in the 108-basis-point contraction of the gross margin to 16.7% and the collapse of adjusted operating profit to just $13 million from $66 million in the prior-year quarter. This pressure was compounded by continued softness in U.S. front-end retail, where comparable sales declined 2.4%. The most significant development, however, is the pending acquisition by Sycamore Partners, which fundamentally reframes the investment case. In light of this deal, expected to close in Q3 or Q4 of calendar year 2025 and take the company private, WBA has withdrawn its fiscal 2025 guidance, rendering traditional forward-looking operational analysis secondary to the M&A event.

Key Decisions for Investors

• The investment thesis for WBA has shifted from a long-term operational turnaround to a merger arbitrage play; focus should be on the timeline, regulatory hurdles, and probability of the Sycamore Partners acquisition closing successfully.
• Monitor underlying operational metrics, such as the negative operating cash flow and declining gross margins, not as indicators of future growth but as potential risk factors that could affect the terms or completion of the pending acquisition.
• Given the withdrawal of guidance and pending privatization, investors should limit exposure based on fundamental valuation and instead evaluate their position based on the spread between the current stock price and the implied deal value, factoring in the time value of money and deal-related risks.