Walgreens Beats Expectations, Announces Major Store Closures
Walgreens Boots Alliance reported better-than-expected fourth-quarter fiscal 2024 results on Tuesday, exceeding Wall Street’s sales and profit projections. This positive financial news, however, comes alongside a significant restructuring plan involving the closure of approximately 1,200 underperforming stores over the next three years. This bold move, coupled with aggressive cost-cutting initiatives, signals Walgreens’ proactive approach to navigating a challenging retail pharmacy landscape marked by reimbursement pressure and softening consumer spending. The company’s stock price jumped approximately 8% in premarket trading following the announcement.
Key Takeaways: A Restructuring for Growth
- Exceeded earnings expectations: Walgreens reported adjusted earnings per share of $0.39, surpassing the anticipated $0.36.
- Revenue beat predictions: Total revenue reached $37.55 billion, significantly higher than the projected $35.76 billion.
- Massive store closure plan: Approximately 1,200 stores slated for closure over three years, with 500 closures planned for fiscal year 2025 alone.
- Aggressive cost-cutting success: Walgreens surpassed its target of $1 billion in cost reductions.
- Positive future outlook (relatively): While facing challenges, the company projects growth in its U.S. health care and international segments, offsetting declines in retail pharmacy.
Financial Performance: A Mixed Bag of Success
Walgreens’ fiscal fourth-quarter results presented a complex picture. While the company successfully beat analyst expectations on both earnings per share and revenue, a significant net loss of $3 billion ($3.48 per share) was reported. This loss, however, is largely attributable to a valuation allowance aimed at reducing deferred tax assets linked to opioid settlements. Excluding these items, adjusted earnings reached $0.39 per share, exceeding expectations.
Revenue Breakdown: Growth Across Divisions
The company reported growth across all three of its business units: U.S. Healthcare, U.S. Retail Pharmacy, and International. The U.S. Healthcare segment, fueled by growth in VillageMD (a primary care provider) and Shields Health Solutions (a specialty pharmacy), saw sales jump to $2.11 billion, a 7.1% increase year-over-year. VillageMD’s performance is particularly noteworthy, given that Walgreens is now considering selling this segment, implying a shift in the company’s strategic priorities. The U.S. Retail Pharmacy segment generated $29.47 billion in sales, a 6.5% year-over-year increase; while this is good news in isolation, the company acknowledged that margin pressure from falling prescription drug reimbursement rates remains a challenge.
The International segment, driven primarily by its Boots stores in the U.K., contributed $5.97 billion in sales, representing a 3.2% rise from the previous year. Growth in the international segment contributes in offsetting some loses in other places, especially the U.S. retail segment. While still operating profitably, the company acknowledges a drop in retail sales (3.5% decline), suggesting ongoing challenges in the broader consumer market.
The Store Closure Strategy: A Necessary Evil?
The announcement of closing approximately 1,200 stores over the next three years is arguably the most significant aspect of Walgreens’ report. The company explicitly stated that closing these underperforming locations will be “immediately accretive” to its adjusted earnings and free cash flow. This suggests a strategic move to optimize its store portfolio, focusing resources on more profitable locations and potentially investing in alternative revenue streams (e.g., expansion of its healthcare services). This cost-cutting measure, in addition to layoffs and AI-driven supply chain improvements, has allowed Walgreens to not only meet, but surpass, its established cost-reduction goals for fiscal year 2024.
Impact and Rationale Behind Closures
With approximately 8,700 locations in the U.S., Walgreens identified a substantial portion (a quarter) operating at a loss. The closure of these 1,200 stores represents a significant reshaping of the company’s physical presence. This strategic decision underlines the company’s commitment to fiscal responsibility and long-term profitability. It is a response to challenges facing the retail pharmacy industry, such as decreased reimbursement rates for medications and shifts in consumer behavior. The 500 store closure target is set for fiscal 2025, indicating a significant operational undertaking in the next year. While potentially unsettling for employees and communities impacted by the closures, the move could prove vital for the company’s financial health and future prospects.
Future Outlook and Guidance: Navigating Uncertain Waters
Walgreens provided guidance for fiscal 2025 that largely aligned with analyst expectations. The company anticipates growth in its U.S. health care and international segments, which will counterbalance an expected decline in its retail pharmacy segment. The company projects adjusted earnings per share in the range of $1.40 to $1.80, while analysts predicted $1.75. Further, revenue is projected between $147 billion and $151 billion, closely mirroring the analysts’ estimate of $147.3 billion. This suggests a cautious optimism about future performance, acknowledging challenges while maintaining a positive outlook.
CEO Commentary and Strategic Shift
Walgreens CEO Tim Wentworth, who assumed his position nearly a year ago, highlighted the company’s “disciplined execution on cost management, working capital initiatives, and capex reduction” as key drivers behind the improved results. This statement underlines a new focus on operational efficiency and cost control during Wentworth’s stewardship, indicating a strong emphasis on profitability over rapid expansion.
Conclusion: A Turnaround in Progress?
Walgreens’ fourth-quarter results and accompanying announcement of significant store closures present a mixed but hopeful picture. The company’s ability to beat earnings and revenue expectations demonstrates financial resilience, while the planned closures underscore a strategic shift toward profitability and efficient resource allocation. The long-term success of this strategy remains to be seen, but the initial market reaction (a significant stock price increase) suggests a degree of investor confidence. Nonetheless, the challenging pharmacy reimbursement landscape and evolving consumer preferences continue to represent headwinds, and Walgreens’ future success depends on its execution of this bold restructuring plan.
