Pharmacy chain Walgreens reported better-than-expected earnings on Thursday, but analysts are not confident in its ability to recover from a difficult few years of declining demand for COVID vaccines and treatments and increased retail competition.
Walgreens beat earnings estimates, posting a 6.3% year-over-year jump in sales to $37.1 billion, as well as a 3.4% increase in earnings per share to $1.20. But the rest of the report tells the story of a more fragile company: It reported an operating loss of $13.2 billion, of which $12.4 billion was a non-cash impairment charge, or write-off related to primary care provider VillageMD, which plans to close 160 unprofitable locations. The losses prompted Neil Saunders, GlobalData’s chief executive, to call the earnings period “another torrid quarter.”
“While these are technical adjustments, they highlight the poor strategic decisions Walgreens has made in recent years and its various misadventures in healthcare,” Saunders wrote in a note Thursday. “With the company looking to increase profitability under the leadership of a new CEO, Walgreens had to take a big step back from the operations it considered central to its future.”
Walgreens anticipated some of its headwinds, notably including a drop in earnings from its February sale of $992 million in stock of wholesale pharmaceutical company Cencora, which prompted the company to lower the top half of its earnings per share adjusted for the full year from $3.50 to $3.35. The company hopes to save $1 billion over the course of the year. CEO Tim Wentworth, who took the helm of Walgreens last October after a tumultuous period of staff strikes over poor working conditions, instead attributes Walgreens’ future challenges to the retail side of the company, which has struggled due to consumers’ reluctance to purchase discretionary items.
Walgreens reported sales growth of 4.7% in the pharmacy sector due to rising inflation and drug costs, but a total sales decline of 4.5% in the retail sector. Deloitte’s March ConsumerSignals report indicates that discretionary spending intentions are still below overall spending intentions, which have seen ups and downs since the recovery from the pandemic.
“We’re counting on people coming in and not just visiting our pharmacies, but coming in, buying impulse items, getting last-minute items, getting seasonal items,” Wentworth told Bloomberg TV on Thursday. “A lot of these things are purchases that you have to find the right value equation on, otherwise they seem discretionary to people.”
Competitor CVS is facing similar challenges. Both announced reductions in primary care initiatives last fall after rising drug prices and lower demand for pandemic treatments slowed store traffic. Bankrupt Rite Aid, another drugstore chain, also closed a total of 1,500 stores. Additionally, a weak respiratory disease season has meant fewer people are buying tissues and over-the-counter medicines.
Change your retail strategy
To be sure, Walgreens has made great efforts to attract cash-strapped customers. A Walgreens spokesperson said so 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 introduced 37 new own-brand products last quarter and is using stock-keeping unit rationalization to determine which products are most attractive to consumers.
While customers buy generic products at Walgreens for convenience, they go elsewhere for bargains, Saunders said. Walgreens has been losing ground especially in the beauty industry, where customers are willing to spend more but turn to competitors like Target and Ulta, which offer broader selections and lower prices. Walgreens is not lagging in retail sales because of shoppers’ reluctance to spend money, Saunders said. It is losing money as consumers go elsewhere for better deals and products.
“Basically, Walgreens is losing ground because it’s not very good at retail,” he said.
But Wentworth doubled down on the importance of the physical Walgreens store, saying Thursday that its customer service is what sets it apart from e-commerce giants like Amazon.
“We will beat Amazon because of the human interface we provide in communities and neighborhoods,” he told CNBC.
Saunders said it Fortunehowever, that Walgreens is not known for its customer service, and because customers frequent Walgreens for convenience, they often do not require high levels of help.
“Walgreens’ view that this is an area of strength for the chain is wishful thinking,” Saunders said.