Pharmacy chain Walgreens posted better-than-expected earnings on Thursday, however analysts should not assured in its capacity to recuperate from a challenging few years of reducing demand for COVID vaccines and coverings and elevated retail competitors.
Walgreens beat earnings estimates, posting a 6.3% gross sales leap year-over-year to $37.1 billion, in addition to 3.4% earnings per share bump of $1.20. However the remainder of the report tells the story of a extra fragile firm: It reported a $13.2 billion working loss—$12.4 billion of which was a non-cash impairment cost, or write-off associated to primary-care supplier VillageMD, which plans to close down 160 unprofitable locations. The losses prompted Neil Saunders, managing director of GlobalData, to name the earnings interval “another torrid quarter.”
“While these things are technical adjustments, they underline the poor strategic decisions Walgreens has made over the past few years and its various misadventures in health care,” Saunders wrote in a Thursday be aware. “With the focus of the business firmly on driving profitability under a new CEO, Walgreens has had to take a very big step back from operations that it used to see as central to its future.”
Walgreens anticipated a few of its struggles, significantly together with an earnings hit from its February sale of $992 million in shares of wholesale drug company Cencora, which pushed the corporate to decrease the highest finish of its full-year adjusted earnings per share from $3.50 to $3.35. The corporate hopes to save lots of $1 billion over the course of the yr. CEO Tim Wentworth—who took Walgreens’ helm final October after a tumultuous interval of staff walkouts over poor working situations—as a substitute attributes Walgreens’ future challenges to the retail facet of the enterprise, which has struggled due to client’s unwillingness to purchase discretionary objects.
Walgreens reported a 4.7% gross sales development on the pharmaceutical facet of the enterprise attributable to rising inflation and drug prices, however a 4.5% whole gross sales decline on the retail facet. Deloitte’s March ConsumerSignals report signifies that discretionary spending intentions are nonetheless under general spending intentions, which have ebbed and flowed since restoration from the pandemic.
“We count on folks to come in and to not only visit our pharmacies, but come in, buy impulse items, get last-minute items, get seasonal items,” Wentworth told Bloomberg TV on Thursday. “A lot of those things are purchases that you have to get the value equation right on or else they feel discretionary to folks.”
Competitor CVS is having comparable struggles. Each introduced scale backs on primary care initiatives final fall after rising drug costs and a lessened demand for pandemic therapies slowed retailer visitors. Bankrupt Rite Aid, one other drug retailer chain, additionally closed a mixed 1,500 shops. Plus, a weak respiratory sickness season meant fewer individuals had been shopping for tissues and over-the-counter medication.
Retail technique modifications
To make certain, Walgreens has taken larger swings to draw cash-strapped prospects. A Walgreens spokesperson advised Fortune that the chain is “responding to these market dynamics by making investments in key value items, and focusing our capabilities to engage with customers in a very targeted way.” Walgreens launched 37 new own-brand merchandise final quarter and is utilizing inventory maintaining unit rationalization to find out which merchandise are extra interesting to shoppers.
Whereas prospects are shopping for basic merchandise at Walgreens out of comfort, they’re going elsewhere to search out bargains, Saunders mentioned. Walgreens has significantly been shedding out within the magnificence sector, the place prospects are prepared to spend extra money, however are turning to opponents like Target and Ulta, which supply bigger alternatives and decrease costs. Walgreens isn’t lagging in retail gross sales due to customers unwilling to spend cash, Saunders asserted. It’s shedding cash as a result of shoppers are going elsewhere for higher offers and merchandise.
“Basically, Walgreens is losing out because it is just not very good at retailing,” he mentioned.
However Wentworth doubled down on the significance of brick-and-mortar Walgreens, saying on Thursday that its buyer companies is what separates it from ecommerce giants like Amazon.
“We will beat Amazon because of the human interface that we offer in communities and neighborhoods,” he told CNBC.
Saunders advised Fortune, nevertheless, that Walgreens shouldn’t be identified for its customer support, and since prospects frequent Walgreens out of comfort, they usually don’t require excessive ranges of assist.
“Walgreens’ view that this is an area of strength for the chain is a case of wishful thinking,” Saunders mentioned.
