Walgreens Is the Canary in the Stock Market’s Coal Mine

July 9, 2020 5:54 PM UTC
Walgreens stock dragged the Dow into the red today. The reason why should give the entire stock market pause as earnings season unfolds.
  • Shares of Walgreens are down nearly double-digits after reporting dismal earnings.
  • Investors expected the company to handle the pandemic well.
  • The grim reality is indicative of a frustrating earnings season ahead for stocks.

Pharmacy chain Walgreens Boots Alliance (NASDAQ: WBA) reported earnings this morning. The numbers weren’t pretty. With expectations of $1.17 per share, the Dow Jones stock earned just 83 cents for the quarter ended May 31st.

Walgreens Was Positioned to Weather the Pandemic – Its Earnings Were a Disaster Anyway

Shares of Walgreens remain near 52-week lows following their earnings miss. Will more stocks join WBA as earning season unfolds? | Source: Yahoo Finance

Even worse, the company reported losses of 61 to 65 cents per share in pandemic-related costs.

The biggest hit came from the United Kingdom. Stay-at-home orders led to a staggering 85% drop in sales, even though its stores stayed open as an essential business.

Things aren’t looking up now that economic activity is resuming. Going forward, earnings will suffer from higher supply-chain costs. Other pandemic-related expenses – such as increased store cleanings – will drive down profit margins further.

The news was enough to send shares of the company, a core component of the Dow Jones Industrial Average (DJIA), down nearly 10% in afternoon trading.

As Walgreens Goes, so Goes the Stock Market

Investors will eventually wake up to the reality of what the hit to earnings means for stock market valuations. | Source: AP Photo/Richard Drew

On the plus side, the company reported a 3% rise in sales at U.S. stores. Management said online sales started topping numbers usually only seen on Black Friday.

While this slight uptick in U.S. sales gives bulls a silver lining, the results may be worse than they initially appear. Consider the fundamentals. This is a retail chain that was open during the worst of the pandemic-driven lockdowns, and it specializes in the types of staples that saw demand spikes.

The company couldn’t have been positioned much better to weather the crisis, but it still posted a quarterly loss. And it’s reporting that lingering fallout from the pandemic will eat into profits for years.

That’s a huge warning sign for the stock market.

As the pandemic unfolded, nearly half of S&P 500 companies pulled guidance, leaving investors with no data ahead of earnings. | Source: AlphaSense

Nearly half of all S&P 500 companies have pulled guidance entirely. That’s a big enough list to ensure that isn’t some isolated sector of the economy.

The entire market is in trouble, and investors are flying blind.

Stock Market Valuations Will Not Ignore Earnings Forever

Most companies will have pandemic-related costs that will impact the bottom line akin to Walgreens, possibly for the foreseeable future.

If a company positioned to handle the crisis this year ended up doing this poorly, the stock market faces a genuine risk of retesting its March lows.

Investors should prepare themselves accordingly and rethink stocks that looked like a source of relative safety during the pandemic, particularly if they rely on in-person shopping.

Earnings and profit margins will almost certainly remain depressed through the end of the year – and likely into 2021. The stock market hasn’t priced in this reality yet; it will eventually.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.

Josiah Wilmoth edited this article for CCN.com. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

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