Walgreens Boots Alliance's stock headed for 27-year low after profit miss and lowered guidance

By Ciara Linnane

Drugstore chain is closing underperforming stores as it struggles with a weak consumer, pressure on pharmacy margins

Walgreens Boots Alliance Inc.'s stock (WBA) fell 25% on Thursday, after the drugstore chain's fiscal third-quarter profit fell short of estimates and it again lowered guidance to reflect a stressed consumer following a period of high inflation.

The stock was last trading at $12.19, a level last seen in 1997, and is down 40% in the year to date, underperforming the S&P 500's SPX roughly 15% gain. Volume of 80 million shares that changed hands by noon was 6.4 times the 65-day daily average.

The company's high-yield bonds were caught up in the downdraft, sending spreads sharply wider.

See: Walgreens' junk bonds among biggest decliners in high-yield market after earnings disappoint

"We continue to face a difficult operating environment, including persistent pressures on the U.S. consumer and the impact of recent marketplace dynamics, which have eroded pharmacy margins," Chief Executive Tim Wentworth said in prepared remarks.

The company is focused on bolstering its core business of retail pharmacy, "which is central to the future of healthcare. We are addressing critical issues with urgency and working to unlock opportunities for growth," he added.

The company is finalizing a multiyear streamlining program that will see it close underperforming U.S. stores, and it is launching a U.S. retail pharmacy action plan to invest in and deliver an improved customer and patient experience across channels. That's as prescriptions have slowed 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 been squeezed by 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 turnaround mode.

"We recognize that we need to be focused on what are the parts of the business that we believe are contributing and have a future, and some of those need to change," he told the paper.

Walgreens has plans to align U.S. pharmacy and healthcare organizations and to simplify its U.S. healthcare portfolio. The company is aiming to save $1 billion this year with measures including layoffs and store updates.

"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 retail pharmacy will become more important to the healthcare industry over time.

"With widespread demand for convenient healthcare solutions, including chronic diseases, and nationwide labor shortages, the pharmacy and pharmacists have never been more important," he said.

But Walgreens stores need to evolve with changing demographics and preferences, he noted. For now, 75% of its U.S. stores contribute about 100% of segment AOI, or adjusted operating income. Many of the remaining 25% are not contributing, and a significant number will be closed in the next three years, he said.

The company has more than 8,700 locations in the U.S., according to its website, and more than 12,500 retail locations globally.

"For the remaining portion of this cohort, we are taking action to return them to profitability and deliver an improved customer experience. We will contemplate additional closures if performance does not improve, which includes external factors such as reimbursement rates," he said.

The Deerfield, Ill.-based Walgreens had net income of $344 million, or 40 cents a share, for the quarter to May 31, up from $118 million, or 14 cents a share, in the year-earlier period.

Adjusted for one-time items, earnings per share came to 63 cents, below the 68-cent FactSet consensus.

Sales rose to $36.351 billion from $35.415 billion a year ago, ahead of the $35.941 billion FactSet consensus.

By segment, sales at the U.S. retail pharmacy rose 2.3% to $28.5 billion, as same-store sales rose 3.5% from a year ago. Pharmacy sales were up 4.4% and same-pharmacy sales were up 5.7%. Retail sales fell 4% and same-retail sales fell 2.3%.

The international segment saw sales rise 2.8% to $5.7 billion. Boots UK same-pharmacy sales rose 5.8%, while same-retail sales were up 6%.

U.S. healthcare sales rose 7.6% to $2.1 billion, led by VillageMD and Shields, the company's primary-care clinics and specialty pharmacy, respectively.

Walgreens booked a $5.8 billion goodwill impairment charge on its VillageMD investment in the second quarter, after a test of the unit showed that the fair value of the business was below its carrying value.

The charge came after VillageMD management provided Walgreens with a lower long-term performance forecast that includes the impact of closing about 160 clinics and slower trends in inpatient panel growth.

See also: Walgreens to cut prices on over 1,300 products as stock keeps sinking

The company lowered its full-year adjusted EPS guidance to a range of $2.80 to $2.95 from the range of $3.20 to $3.35 that was offered with second-quarter earnings in March, to reflect challenging pharmacy-industry trends and a worse-than-expected U.S. 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 is not expecting an improvement in the U.S. retail environment in the rest of the year and expects growth in prescription volumes to remain muted.

Jeff Jonas of Gabelli Funds said the stock move was "deserved."

"I have a hard time seeing how they turn this business around," Jonas said in emailed comments. "The front of the store is in structural decline as people shop online and at big box stores like Costco and Walmart. I don't see that traffic or business turning around anytime soon."

Gabelli is advising investors to sell the stock.

CVS Health Corp. (CVS), meanwhile, was down 4.7%. Rite Aid Corp. (RADCQ) filed for bankruptcy last October.

Also read (January 2024): Walgreens' stock turns sharply lower after dividend halved to bolster cash flow

-Ciara Linnane

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06-29-24 0802ET

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