Walgreens, one of the largest pharmacy chains in the United States, is preparing to close a significant number of its stores as it grapples with a challenging retail environment and stunned consumers facing high prices. The announcement came as the company reported quarterly earnings that fell short of Wall Street expectations, leading to a sharp 22% drop in its stock price.
CEO Tim Wentworth, who took the helm in October, highlighted the difficulties faced by U.S. consumers and the broader pharmacy sector. “We assumed that in the second half of the year, the consumer would get somewhat stronger, but that is not the case,” Wentworth said in an interview with CNBC. “The consumer is absolutely stunned by the absolute prices of things, and the fact that some of them may not be inflating doesn’t actually change their resistance to the current pricing.”
In response to these challenges, Walgreens has already taken steps to alleviate financial strain on its customers. Last month, the company announced plans to slash prices on 1,300 items. However, the more drastic measure involves potentially closing up to 25% of its approximately 8,600 stores. “Seventy-five percent of our stores drive 100% of our profitability today,” Wentworth noted. “What that means is the others we take a hard look at, we are going to finalize a number that we will close.”
The company has been struggling for years, with its share price steadily declining from a peak of over $95 a share in 2015 to less than $15 today. Walgreens has faced reduced revenues from prescription drugs and increased competition from big-box chains and online retailers like Amazon. Last summer, the company announced plans to close 150 U.S. stores, and it has already closed 625 stores in the U.S. and 484 in the UK.
The current economic environment has exacerbated these issues. Inflation has significantly impacted consumer spending, making shoppers more selective and price-sensitive. This has led to a decline in retail sales, with Walgreens reporting a 4% drop for the quarter. The company also slashed its profit forecast, predicting an adjusted profit of $2.80 to $2.95 per share for the financial year ending in August, down from the $3.20 to $3.35 per share range announced in March.
“The results this morning were just absolutely terrible,” said David Wagner, portfolio manager and equity analyst at Aptus Capital Advisors. “They brought in new CEO Tim Wentworth, and he has a good history on the healthcare services side, but investors are focused on his next steps.”
Wentworth has announced a turnaround plan that includes closing underperforming stores, removing multiple mid-level executives, and implementing a $1 billion cost-cutting initiative. The company is also aiming to simplify its U.S. healthcare portfolio, which includes primary care provider VillageMD. Wentworth indicated that Walgreens would no longer be VillageMD’s majority owner.
Despite these challenges, there are some bright spots for Walgreens. The company’s healthcare segment, which includes on-site medical services and specialty pharmacy offerings, topped revenue estimates. Walgreens views these services as critical to its transformation from a major drugstore chain into a large healthcare company.
However, the road ahead remains uncertain. The company has halved its dividend to 25 cents per share earlier this year to conserve cash, as inflation continues to dampen spending on over-the-counter products and pressure increases on reimbursement payments for filling prescriptions. The company also conducted a review of its Boots UK business and concluded it would continue to invest in it.
Walgreens’ struggles are not unique in the industry. Major drugstore chains, including CVS and Rite Aid, have faced declining profits from filling prescriptions due to lower reimbursement rates and new competition from Amazon. The front end of drugstores, where they sell snacks and household staples, also faces pressure from larger competitors like Target and dollar stores.
The company has made some changes to its store assortment, removing eight national brands and replacing them with similar items produced by its house brands or “preferred partners.” However, these efforts have not been enough to offset the broader challenges facing the industry.
The Covid-19 pandemic initially provided a boost to drugstores as people flocked to get vaccines, but fewer consumers are now visiting stores to shop, and prescription volumes are falling as people undergo fewer elective procedures. Additionally, the company has not benefited as expected from GLP-1 drugs like Ozempic and Mounjaro, which are used to treat weight loss and diabetes.
As Walgreens navigates these turbulent times, the company is focused on its core business of retail pharmacy. “We have a really strong level of conviction around the core business that we are remodeling here,” Wentworth said. “It will be a very different Walgreens.”
The coming years will be critical for Walgreens as it implements its turnaround plan and seeks to regain its footing in a challenging retail environment. The company’s ability to adapt to changing consumer behaviors and economic conditions will determine its future success.
Source: NBC News, CNBC, USA Today, CNN
