Shares of Walgreens tumbled more than 20% on Thursday after the company reported third-quarter profit that missed expectations and cut its full-year adjusted earnings forecast, citing a “difficult” environment for pharmacies and U.S. consumers.
The pharmacy giant now expects adjusted earnings of $2.80 to $2.95 per share for fiscal 2024. In comparison, the company's previous forecast was $3.20 to $3.35 per share.
“We expected consumers to get a little stronger in the second half of the year,” but “that's not the case,” Walgreens CEO Tim Wentworth told CNBC.
He added: “Consumers are completely baffled by the absolute prices of things, and the fact that some of them may not go up does not change their resistance to current prices. So we've had to be really vigilant, especially on non-essential things.”
Still, Walgreens beat revenue estimates for the quarter thanks to strong performance in its healthcare division, which the company views as critical to its ongoing transformation from a major drugstore chain to a major healthcare company.
The results come as Walgreens works to dramatically reduce costs after a difficult last year marked by low pharmacy reimbursement rates, weakening demand for Covid products and a challenging macroeconomic environment.
The company said Friday that, among other ongoing cost-cutting measures, it is simplifying its U.S. health care portfolio and finalizing plans to close low-revenue U.S. stores over several years.
“Seventy-five percent of our deals today account for 100 percent of our profitability,” Wentworth said. “That means we're going to look closely at the others and close a certain number of them.”
Here's what Walgreens reported for the three-month period ended May 31 compared to Wall Street expectations, based on a survey of analysts conducted by LSEG:
- Earnings per share: 63 cents adjusted compared to 68 cents expected
- Revenue: $36.4 billion compared to expected $35.94 billion
Walgreens reported revenue of $36.4 billion for the quarter, up 2.6% from the same period last year.
The company reported net income of $344 million, or 40 cents per share, for the quarter. During the same period last year, net income was $118 million, or 14 cents per share.
Excluding certain items, adjusted earnings for the quarter were 63 cents per share.
Walgreens did not provide a new revenue forecast for the fiscal year. The company has not provided such guidance since October, when it expected sales of $141 billion to $145 billion.
Strong development in the healthcare sector
Walgreens reported growth in all three business areas in the third quarter. However, the company's U.S. healthcare division deserves special mention, with sales increasing 7.6 percent compared to the same period last year.
The segment's revenue amounted to $2.13 billion. According to FactSet estimates, analysts had expected revenue of $2.08 billion.
The company said the higher sales were driven by primary care physician VillageMD and specialty pharmacy company Shields Health Solutions. Shields saw a 24% jump in sales during the period, driven by growth within existing partnerships.
Specialty pharmacies specialize in dispensing medications with special handling, storage and distribution requirements, often for patients with complex conditions such as cancer and rheumatoid arthritis.
Walgreens and VillageMD
Source: Walgreens
These results come a quarter after Walgreens posted a large net loss as it took a large charge of nearly $6 billion related to the decline in value of its investment in VillageMD. The company now plans to close 160 VillageMD clinics, executives announced during the company's second-quarter earnings call in March.
“We are working with their management team to ultimately remain an investor but significantly reduce our investment and gain some liquidity so that we can reinvest in the pharmacy business, which is our future,” Wentworth told CNBC about the company's investment in VillageMD.
Walgreens' US pharmacy division generated sales of $28.5 billion in the third quarter of the fiscal year, an increase of 2.3 percent over the same period last year. Analysts had expected sales of $28.34 billion, according to FactSet estimates.
This segment operates more than 8,000 drugstores in the United States that sell prescription and nonprescription drugs, as well as health and wellness, beauty, personal care and nutritional products.
The company said the revenue growth was entirely due to comparable pharmacy sales and was partially offset by a decrease in retail revenue.
Walgreens said pharmacy sales increased 4.4% in the quarter and comparable pharmacy sales increased 5.7% compared to the same period last year, due to price increases for brand-name drugs and the increase in prescription drugs.
The total number of prescriptions filled during the quarter, including vaccines, was 306.4 million, an increase of 0.5% over the same period last year.
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Retail sales fell 4% in the quarter compared to the same quarter last year and comparable retail sales fell 2.3%. The company cited a “difficult” retail environment, among other things.
Walgreens' international segment, which operates more than 3,000 retail stores abroad, reported third-quarter sales of $5.73 billion, up 2.8% from the same period last year.
The company said sales of its UK-based drugstore chain Boots rose 1.6 percent.
As Bloomberg News reported earlier this month, Walgreens has scrapped plans for a possible IPO of its subsidiary and is in informal talks with potential buyers, including private equity firms.
However, Wentworth said Walgreens has no plans to sell the chain.
“There is no doubt at this point that Boots is a major backer for us,” he told CNBC.
— CNBC's Bertha Coombs contributed to this report.
