By Ciara Linnane
The drugstore chain is closing underperforming stores due to consumer weakness and pressure on pharmacy margins
Shares of Walgreens Boots Alliance Inc. (WBA) fell 25% on Thursday after the drugstore chain's fiscal third-quarter earnings missed estimates and cut its estimates again to reflect a stressed consumer following a period high inflation.
The stock last traded at $12.19, a level last seen in 1997, and is down 40% so far this year, underperforming the S&P 500's SPX, which gained about 15%. Volume of 80 million shares changing hands by midday was 6.4 times the 65-day daily average.
The company's high-yield bonds were caught in the downdraft, causing spreads to widen significantly.
Watch: Walgreens Junk Bonds Among Highest Fallers in High-Yield Market After Earnings Disappoint
"We continue to face a challenging operating environment, including persistent pressures on the U.S. consumer and the impact of recent market dynamics, which have eroded pharmacy margins," Chief Executive Officer Tim Wentworth said in prepared remarks.
The company is focused on strengthening its core retail pharmacy business, "which is critical to the future of healthcare. We are addressing critical issues with urgency and working to unlock growth opportunities," he added.
The company is finalizing a multi-year rationalization program that will allow it to close underperforming US stores and is launching an action plan for US retail pharmacies to invest in and deliver a better customer and patient experience across all channels. That's because prescriptions have declined and the company has faced reimbursement pressure from pharmacy benefit managers, who negotiate drug prices on behalf of insurers and employers.
The company has also come under pressure from the high price of the new class of diabetes and weight loss drugs known as GLP-1, which includes the highly popular Ozempic and Mounjaro.
In an interview with the Wall Street Journal published Thursday, Wentworth acknowledged that the company is in the recovery phase.
"We recognize that we need to focus on what parts of the business we think are contributing and have a future, and some of those need to change," he told the newspaper.
Walgreens plans to align U.S. pharmaceutical and healthcare organizations and simplify its U.S. healthcare portfolio. The company aims to save $1 billion this year with measures including layoffs and store upgrades.
"The severity and duration of the challenges in the operating environment have only added urgency to our strategic and operational review, and we are addressing them directly," Wentworth told analysts on the company's earnings call, according to a FactSet transcript. .
The company is confident that over time retail pharmacies will become increasingly important to the healthcare sector.
"With widespread demand for convenient healthcare solutions, including chronic diseases, and workforce shortages across the country, pharmacy and pharmacists have never been more important," he said.
But Walgreens stores must evolve with changing demographics and preferences, he said. For now, 75% of its U.S. stores contribute about 100% of the segment's AOI, or adjusted operating income. Much of the remaining 25% aren't contributing, and a significant number will close in the next three years, he said.
The company has more than 8,700 stores in the U.S., according to its website, and more than 12,500 retail locations worldwide.
"For the remainder of this cohort, we are taking steps to return them to profitability and provide a better customer experience. We will consider additional closures if performance does not improve, including due to external factors such as refund rates," he said.
Walgreens, based in Deerfield, Illinois, had net income of $344 million, or 40 cents per share, for the quarter ended May 31, up from $118 million, or 14 cents per share, in the same period a year earlier. .
Adjusted for one-time items, earnings per share came to 63 cents, below the FactSet consensus of 68 cents.
Sales rose to $36.351 billion from $35.415 billion a year ago, ahead of the FactSet consensus of $35.941 billion.
By segment, U.S. retail pharmacy sales increased 2.3% to $28.5 billion, while same-store sales increased 3.5% from a year ago. Pharmacy sales increased 4.4% and same-store sales increased 5.7%. Retail sales decreased 4% and same-store sales decreased 2.3%.
The international segment posted a 2.8% increase in sales to $5.7 billion. Boots UK's comparable pharmacy sales increased by 5.8%, while comparable retail sales increased by 6%.
U.S. healthcare sales increased 7.6% to $2.1 billion, led by VillageMD and Shields, the company's primary care clinics and specialty pharmacy, respectively.
Walgreens recorded a $5.8 billion goodwill impairment charge on its investment in VillageMD in the second quarter after a test of the unit showed the fair value of the business was below its book value.
The allegation came after VillageMD management provided Walgreens with a lower long-term performance forecast that includes the impact of the closure of about 160 clinics and slower trends in inpatient panel growth.
See also: Walgreens to cut prices on more than 1,300 products as stock continues to fall
The company lowered its full-year adjusted EPS guidance to a range of $2.80 to $2.95 from the $3.20 to $3.35 range it offered with second-quarter earnings in March, to reflect the challenging pharmaceutical industry trends and a worse-than-expected US consumer environment.
The FactSet consensus is for full-year EPS of $3.20.
"Our customers have become increasingly selective and price-sensitive in their purchases," Wentworth said on the call.
Walgreens does not expect an improvement in the U.S. retail environment for the remainder of the year and expects growth in prescription volumes to remain moderate.
Jeff Jonas of Gabelli Funds said the stock's move was "deserved."
"I have a hard time imagining how they are going to improve this business," Jonas said in emailed comments. "The front of the store is in structural decline because people shop online and at big box stores like Costco and Walmart. I don't think that traffic or business will improve in the near future."
Gabelli advises investors to sell the stock.
Meanwhile, CVS Health Corp. (CVS) fell 4.7%. Rite Aid Corp. (RADCQ) filed for bankruptcy last October.
Read also (January 2024): Walgreens stock falls sharply after dividend was halved to boost cash flow
-Ciara Linnane
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06-29-24 0802ET
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