Walgreens Boots Alliance Inc.’s stock WBA, -22.16% dropped 25% on Thursday after the drugstore chain’s fiscal third-quarter profit fell short of expectations and it raised its guidance again to reflect the fact that customers are stressed out after a period of high inflation.
The last price of the stock was $12.19, which was the last time it was that high. It is down 40% so far this year, less than the roughly 15% gain seen in the S&P 500. Eighty million shares had changed hands by noon, which is 6.4 times the daily average over the last 65 days.
Spreads got a lot wider on the company’s high-yield bonds when the market went down.
CEO Tim Wentworth said in prepared remarks, “We continue to face a difficult operating environment, including persistent pressures on the U.S. consumer and the impact of recent changes in the marketplace, which have eroded pharmacy margins.”
The company wants to improve its main business, which is retail pharmacy, because it is “central to the future of healthcare.” “We are working quickly to solve important problems and open up growth opportunities,” he said.
The company is finishing up a multiyear streamlining program that will close U.S. stores that aren’t doing well. It is also starting a U.S. retail pharmacy action plan to improve the customer and patient experience across all channels and invest in this. That’s because prescriptions have slowed down and pharmacy-benefit managers, who negotiate drug prices on behalf of insurers and employers, have put pressure on the company to get more money back.
Aside from that, the company has also been hurt by the high cost of GLP-1 drugs, which are a new group of very popular diabetes and weight-loss medicines.
In an interview with the Wall Street Journal that came out Thursday, Wentworth said that the company is in the process of turning things around.
“We know we need to focus on the parts of the business that we think are making a difference and have a future,” he told the paper. “Some of those parts need to change.”
Walgreens wants to simplify its U.S. healthcare portfolio and bring its U.S. pharmacy and healthcare organizations into line with each other. This year, the company wants to save $1 billion by doing things like laying off workers and updating stores.
A transcript of Wentworth’s earnings call with analysts shows that he told them, “The severity and duration of the challenges in the operating environment have only added to the urgency of our strategic and operational review, and we are addressing them directly.”
The business is sure that over time, retail pharmacies will become more important to the health care field.
“Because of a lack of workers across the country and high demand for easy access to health care, including for people with chronic diseases, the pharmacy and pharmacists have never been more important,” he said.
But he said Walgreens stores need to change to keep up with changing tastes and demographics. At the moment, 75% of its U.S. stores bring in about 100% of the segment’s AOI, or adjusted operating income. He said that many of the last 25% are not contributing and that a lot of them will close in the next three years.
The company’s website says it has more than 8,700 stores in the U.S. and more than 12,500 stores around the world.
“For the rest of this group, we are taking steps to get them back to making money and giving customers a better experience.” He said, “We will think about more closures if performance doesn’t get better, which includes things like reimbursement rates that come from outside the company.”
Walgreens, based in Deerfield, Ill., made $344 million, or 40 cents per share, in the quarter ending May 31. This was up from $118 million, or 14 cents per share, in the same time last year.
After one-time items were taken into account, earnings per share were 63 cents, which was less than the 68-cent FactSet consensus.
It was better than the $35.941 billion consensus that sales would rise to $36.351 billion from $35.415 billion a year ago.
In the U.S., sales at retail pharmacies rose 2.3% to $28.5 billion, and sales at the same stores rose 3.5% from the previous year. Sales at pharmacies went up 4.4%, and sales at the same pharmacy went up 5.7%. Sales at stores fell 4%, and sales at the same stores fell 2.3%.
Sales in the international market went up 2.8% to $5.7 billion. Same-store sales at Boots UK went up 6%, and same-pharmacy sales went up 5.8%.
Healthcare sales in the U.S. went up 7.6% to $2.1 billion, with VillageMD and Shields, the company’s primary care clinics and specialty pharmacy, driving the growth.
In the second quarter, Walgreens took a $5.8 billion goodwill impairment charge on its VillageMD investment. This was because a test of the unit showed that it was worth less than what it was booked at.
The charge came after VillageMD management gave Walgreens a lower long-term performance forecast that took into account the effects of closing about 160 clinics and slower growth rates in inpatient panels.
The company lowered its full-year adjusted EPS guidance from a range of $3.20 to $3.35 to a range of $2.80 to $2.95. This was done because of tough trends in the pharmacy industry and a worse-than-expected consumer environment in the U.S.
Overall, FactSet thinks that EPS will be $3.20 for the whole year.
“Our customers are becoming more picky and price conscious about what they buy,” Wentworth said on the call.
Walgreens doesn’t think the U.S. retail market will get better any time soon, and they don’t think the number of prescriptions will grow much more this year either.
Gabelli Funds’ Jeff Jonas said the stock move was “deserved.”
As Jonas wrote in an email, “I have a hard time seeing how they turn this business around.” It’s getting worse in front of the store because more people shop online and at big box stores like Walmart and Costco. I don’t think that business or traffic will get better any time soon.
Gabelli tells investors that they should get rid of the stock.
