The fading of the Covid 19 pandemic couldn’t have come sooner for the vast majority of the economy, which is currently reaping the bounty of pent-up demand for the vast array of outdoor experiences that have been restricted for the greater part of the last three years.
However, one of the businesses that can be excused for not being as thrilled is Walgreens Boots Alliance, Inc. (WBA). In October 2022, the company announced a slew of store closures across states, such as New York, Kentucky, Florida, Massachusetts, and Colorado. More recently, WBA announced that it expects to close 150 of its almost 900 locations in the United States and 300 locations in the United Kingdom.
The second-largest pharmacy store in the U.S., which has been around since 1901, missed its earnings estimate for the first time in three years. Moreover, at $118 million, or $0.14 a share, its third-quarter earnings were actually lower compared to $289 million, or $0.33 a share, a year ago.
In addition to muted consumer spending due to a not-so-transitory inflation and borrowing costs which could climb higher by the end of this year, much of this slowdown could be attributed to a pullback in demand for Covid vaccines. Sales of covid vaccines during the quarter plummeted 83% to 800,000, down from 4.7 million in the same period last year.
Given the fading tailwind of covid vaccine demand, the Illinois-headquartered integrated healthcare, pharmacy, and retailing company slashed its full-year earnings guidance to a range of $4.00 to $4.05 per share, down from its previous forecast of $4.45 to $4.65 per share.
CEO Rosalind Brewer said the company is closely watching the end of fiscal stimulus and resumption of student loan payments as potential headwinds that could induce the cautious and value-driven consumer to cut back further on discretionary spending.
Consequently, WBA’s shares slumped 9% following the release. The stock is down 20.5% over the past six months, compared to a 13.3% gain for the S&P 500.
During its second-quarter earnings release, WBA announced its ongoing and long-term transition into a more health-care-oriented company that will involve opening hundreds of doctor’s offices, significant store remodels, and hiring more medical staff. To support the costly transition, the company is “taking immediate actions to optimize profitability” of its U.S. healthcare segment.
CFO James Kehoe told analysts the company will have saved $3.3 billion by the end of this year and is projecting to save “at least” $800 million in 2024. On May 26, WBA announced its decision to slash more than 500 roles or around 10% of its corporate and U.S. office support workforce.
The pharmacist has said that it’s driving further savings by leveraging technology and optimizing its business model to build the “pharmacy of the future” through its micro fulfillment centers, tech-enabled centralization of in-store activities, telepharmacy solutions, and launching initiatives, such as drone delivery.
However, the empowerment of each store to serve broader areas more remotely has come at the cost of a reduction in the total number of locations.
Bottomline
WBA is a company in transition, and transitions, if at all, are seldom linear and painless.
Hence, while the closure of 150 locations is significant, we should be careful not to be denominator-blind and over-react to WBA shedding less than 2% of its 900-strong domestic physical footprint in the interest of morphing from a pharmacist and retailer into a future-ready healthcare service provider.
