Walgreens said it plans to close a “significant number” of its underperforming U.S. retail locations amid what it described as an extremely challenging operating environment.
In a conference call with analysts discussing results for its fiscal third quarter, which ended May 31, CEO Tim Wentworth said that about 25% of the company’s 8,700 U.S. retail stores are currently underperforming. He suggested that some of the underperforming stores could remain open if results improve, but also said the number of store closures could increase if operating conditions continue to deteriorate.
The closures follow the closure of several hundred Walgreens locations during the last few years, including 150 that were announced last year.
“We are at a point where the current retail pharmacy model is not sustainable,” Wentworth said, citing not only pressures on consumer spending but also a challenging pharmacy pricing environment.
Walgreens also said it plans to reduce its stake in VillageMD and will no longer be the majority owner in that primary-care clinic concept. In March, the company had unveiled plans to shutter 160 VillageMD locations.
Walgreens undertook a strategic review at the beginning of the calendar year and determined that the store closures and other actions were necessary to turn the retail business around, Wentworth said. In addition to the store closures, Walgreens also said it was streamlining its SKU assortment and focusing on strengthening certain categories, including health and beauty care and women’s health.
“We will work with fewer partners who are helping us win,” Wentworth said.
For example, in the third quarter, Walgreens eliminated eight health and wellness brands from its shelves and replaced them with its own private labels and products from other “preferred partners.”
The company is also investing in improving the omnichannel experience it provides for customers, Wentworth said, citing the expansion of rapid home delivery as one area of opportunity.
Walgreens has also been in discussions with pharmacy benefit management companies (PBMs) to resolve pricing issues that are stifling the profitability of prescription drugs, he said.
The company reported that its overall adjusted operating income was down 36.3%, to $613 million, in the quarter, compared to year-ago results. The decrease included an adjusted operating income decline of 47.9% in the retail pharmacy division, to $501 million.
Overall sales increased 2.6% percent to $36.4 billion, while retail pharmacy sales were up 2.3% to $28.5 billion. Comparable-store sales rose 3.5%.
In terms of sales growth, the prescription side of the business fared better than other retail areas of the store in the quarter.
Pharmacy sales were up 4.4%, and comparable pharmacy sales increased 5.7% vs. year-ago results, driven by higher branded drug inflation and prescription growth. In retail, sales decreased 4%, and comparable retail sales decreased 2.3%. Retail profit margins were negatively affected by increased promotional activity and higher shrink levels, the company said.
The consumer spending environment was “worse than expected,” Wentworth said.
“Customers have become increasingly selective and price-sensitive in their purchase decisions,” he said.
The company also reduced its earnings outlook for the full fiscal year to a range of $2.80-$2.95 per share, down from previous projections of $3.20-$3.35.
