Dive Brief:
- Walgreens is pulling back its focus on healthcare services after the strategic shift failed to bolster the struggling retailer’s financial health.
- Walgreens plans to reduce its stake in value-based medical chain VillageMD, and will no longer be the company’s majority owner, CEO Tim Wentworth told investors on a Thursday morning call after announcing third quarter earnings below analyst expectations.
- Walgreens also plans to close a “significant portion” of its roughly 8,700 stores in the U.S., Wentworth said. The company didn’t share a specific figure, but said it is reviewing one-quarter of its stores that are underperforming financially. Walgreens has already closed hundreds of stores over the past few years.
Dive Insight:
Walgreens’ plan to turn around its dragging finances is the result of a strategic review Wentworth began in January, after Walgreens brought in the ex-Cigna executive to replace Rosalind Brewer as chief executive.
During her tenure, Brewer spearheaded Walgreens’ strategic shift away from its legacy pharmacy model and toward healthcare delivery, in a bid to lessen significant pressures in the retail pharmacy space, including antiquated reimbursement models and competition from vendors like Amazon.
However, despite heavy investments in that U.S. Healthcare division — especially on growing VillageMD — the business has yet to turn a profit on a nonadjusted basis, spurring a crisis of faith at the company about its strategic direction.
Last year, Walgreens started paring back VillageMD’s footprint to accelerate the division’s drive to profitability. Walgreens then attempted to turbocharge cost savings earlier this year by ramping up closures of VillageMD clinics.
Now, Walgreens is working with VillageMD leadership to shrink its stake in the business, and is no longer interested in investing in medical offices.
“We don’t have plans to continue to invest in brick-and-mortar owned primary care practices,” Mary Langowski, the president of U.S. Healthcare, told investors on the Thursday morning call.
Instead, Walgreens is again recentering its strategy around its core pharmacy business, according to Wentworth.
Walgreens plans to launch a retail pharmacy action plan to improve customer experience in its stores, better align its pharmacy and healthcare businesses and focus on reliable products in areas like women’s health, Wentworth said.
The company is also in discussions with health insurers and pharmacy benefit managers to change how its pharmacies are paid, to create more stability in a challenging reimbursement environment.
Walgreens is following in the footsteps of its national pharmacy rival CVS, which overhauled how its pharmacies charge for prescription drugs late last year in a bid to resuscitate flatlining revenue.
“We’re at a point where the current pharmacy model is not sustainable,” Wentworth said.
Walgreens is also reviewing about 25% of its stores, and plans to close a significant number over the next three years. A store’s profitability and level of shrink will factor into whether or not it remains open, as will consumer behavior and competition in its market, said Tracey Brown, Walgreens’ chief customer officer.
Walgreens could also shutter stores that are close to another Walgreens location, TD Cowen analyst Charles Rhyee wrote in a Thursday note.
The company said it plans to reassign almost every affected employee to another store to avoid widespread job cuts.
But Walgreens isn’t throwing in the towel on healthcare entirely. The company doesn’t plan to sell its Boots drugstore chain in the U.K. or Shields Health Solutions, its specialty pharmacy, according to Wentworth.
Shields been a steady driver of growth for U.S. Healthcare, growing 24% year over year in the third quarter. That contributed to the second quarter of positive adjusted earnings for the division, according to Walgreens’ financial release.
In its drive to cut costs, Walgreens already laid off a sizable chunk of its corporate workforce late last year, and recently offloaded other healthcare assets, including stakes in home infusion provider Option Care Health and drug distributor Cencora.
Despite the actions, Walgreens shares have continued to fall. That downturn continued on Thursday. Stock in Walgreens fell 22% in Thursday morning’s trade, reaching its lowest point since the mid-1990s.
Walgreens' stock has steadily fallen over the past half-decade
During the call, Wentworth said Walgreens’ time horizon for stabilizing its operations may be longer than investors want.
“It’s quarters, not months. It’s probably not multiple years. But it is a period of time that we’re going to have to demonstrate to you and to the consumer that we deserve their presence,” Wentworth said.
Walgreens lowered its 2024 adjusted earnings guidance following the third quarter earnings, expecting challenges to persist into the rest of the year and into 2025, said CFO Manmohan Mahajan.
Walgreens posted revenue of $36.4 billion in the quarter, up 3% year over year. Profit was $344 million, roughly three times Walgreens’ bottom line same time last year.
