Walgreens, the retail pharmacy giant, experienced a significant drop in its stock price, with shares plunging more than 14% following the release of its fiscal third-quarter earnings report. The company fell short of expectations and also revised its full-year adjusted profit outlook downward. Walgreens CEO Tim Wentworth attributed the disappointing performance to a challenging environment for pharmacies and U.S. consumers.
The company now expects adjusted earnings of $2.80 to $2.95 per share for fiscal 2024, compared to its previous projection of $3.20 to $3.35 per share. Wentworth explained that Walgreens had anticipated stronger consumer spending in the second half of the year, but that assumption did not materialize. He noted that consumers are shocked by high prices and are resistant to the current pricing, even if some items are not experiencing inflation. As a result, Walgreens has had to make significant adjustments, particularly in discretionary items.
Despite falling short of profit expectations, Walgreens exceeded revenue estimates for the quarter, thanks to strong performance in its health-care segment. The company views this division as crucial in its ongoing transformation from a drugstore chain to a larger health-care company. This is particularly significant as Walgreens faced challenges last year, including low pharmacy reimbursement rates, declining demand for COVID-related products, and a difficult macroeconomic environment.
In response to these challenges, Walgreens is taking steps to cut costs. The company plans to simplify its U.S. health-care portfolio and close underperforming stores over multiple years. Wentworth emphasized that 75% of their stores drive 100% of their profitability at present, indicating that they will closely evaluate the remaining stores and finalize a number for closure.
In terms of financial performance, Walgreens reported adjusted earnings per share of 63 cents for the quarter, lower than the expected 68 cents. However, the company generated $36.4 billion in revenue, surpassing the projected $35.94 billion. The net income for the quarter was $344 million, or 40 cents per share, an improvement from the previous year’s net income of $118 million, or 14 cents per share.
Walgreens did not provide a new revenue forecast for the fiscal year, with the last guidance given in October, when they projected sales of $141 billion to $145 billion.
The standout performer for Walgreens in the fiscal third quarter was its U.S. health-care unit, which experienced a sales increase of 7.6% compared to the same period last year. The segment generated $2.13 billion in revenue, surpassing analysts’ estimates. This growth can be attributed to primary care provider VillageMD and specialty pharmacy company Shields Health Solutions. Shields saw a significant sales increase of 24% due to growth within existing partnerships.
Specialty pharmacies like Shields cater to patients with complex conditions such as cancer and rheumatoid arthritis, delivering medications with specific handling, storage, and distribution requirements.
Walgreens faced challenges related to its investment in VillageMD, resulting in a significant net loss in the previous quarter. As a result, the company plans to close 160 VillageMD clinics while maintaining a reduced investment. This decision will provide liquidity for reinvestment in the retail pharmacy business, which Walgreens sees as its future.
The U.S. retail pharmacy segment of Walgreens generated $28.5 billion in sales for the fiscal third quarter, representing a 2.3% increase from the previous year. The segment operates over 8,000 drugstores across the country and offers prescription and nonprescription drugs, as well as health and wellness, beauty, personal care, and food products. Pharmacy sales saw an increase of 4.4%, with comparable pharmacy sales rising by 5.7% due to price inflation in brand medications and prescription growth. Total prescriptions filled in the quarter, including vaccines, reached 306.4 million, a slight increase from the previous year.
However, retail sales for the quarter experienced a decline of 4%, with comparable retail sales falling by 2.3%. Walgreens attributed this decline to various factors, including a challenging retail environment.
Internationally, Walgreens posted $5.73 billion in sales for the fiscal third quarter, representing a 2.8% increase from the previous year. The company’s U.K.-based drugstore chain, Boots, accounted for a 1.6% growth in sales.
Recent reports suggested that Walgreens considered an initial public offering (IPO) for its subsidiary Boots but ultimately decided against it. The company is now engaged in informal talks with potential buyers, including private equity firms. However, Wentworth clarified that Walgreens has no plans to sell Boots, as it remains a significant contributor to their overall business.
Despite the challenges faced by Walgreens, the company remains committed to its transformation into a larger health-care company. By focusing on its health-care segment and making necessary cost-cutting measures, Walgreens aims to navigate the challenging retail environment and position itself for future success.
