Walgreens to cut costs by $1 billion this year, with layoffs and store updates

By Tomi Kilgore

Drugstore chain booked a $5.8 billion charge on its VillageMD investment, but reported the biggest adjusted-profit beat in years

Shares of Walgreens Boots Alliance Inc. seesawed to a gain Thursday, after the drugstore chain swung to a large fiscal second-quarter net loss and trimmed its full-year earnings outlook, but also reported the biggest beat for quarterly adjusted profit in at least five years.

The company (WBA) also said it was more than halfway to reaching its goal of cutting costs by $1 billion this year. The saving are being driving primarily in the U.S. Retail Pharmacy business, including through cuts of office-support jobs and improvements in the retail operating model.

Chief Executive Tim Wentworth said an "intense review" of the company's portfolio of assets will be continued over the next three months, to ensure each asset drives growth and delivers value.

Meanwhile, the "challenging retail environment" is expected to keep hurting retail sales in the short term, "with a shift in discretionary spend away from the drug channel as consumers seek value," said Global Chief Financial Officer Manmohan Mahajan on the post-earnings call with analysts, according to an AlphaSense.

The stock rose 1.3% in midday trading, but had down as much as 3.9% and up as much as 4.9% since the earnings report was released at 7 a.m. Eastern.

For the quarter to Feb. 29, the company swung to a net loss of $5.9 billion, or $6.85 a share, from net income of $703 million, or 81 cents a share, in the same period a year ago.

The loss included a $5.8 billion noncash goodwill impairment charge related to VillageMD, the primary-care business in which Walgreens owns a controlling stake, as a test of the unit showed that fair value of the business was below its carrying value.

The charge comes after VillageMD management provided Walgreens with a lower long-term performance forecast, that includes the impact of closing about 160 clinics and slower trends in inpatient panel growth.

Walgreens also booked a $455 million noncash charge related to assets in the U.S. Retail Pharmacy business.

Excluding nonrecurring items, adjusted earnings per share rose 3.4% to $1.20, to beat the FactSet consensus of 82 cents. The margin of the beat - adjusted EPS was 46.6% above expectations - was the biggest since at least the same quarter of 2019, according to available FactSet data.

Sales grew 6.3% to $37.05 billion, the FactSet consensus of $35.86 billion.

U.S. retail pharmacy sales rose 4.7% to $28.86 billion, to top expectations of $28.33 billion, as same-store sales increased 4.8%.

Pharmacy sales rose 8.2%, boosted by higher branded drug prices, while retail sales fell 4.5% due in part to "a challenging retail environment," a weaker respiratory season and lower sales of seasonal and general merchandise.

For the Walgreens U.S. healthcare business, sales jumped 33.2% to $2.2 billion, helped by VillageMD's acquisition of Summit Health.

International sales were up 6.6% to $6.02 billion, helped by favorable currency moves and strength in the wholesale business in Germany.

The company also said free cash flow was negative $610 million, to mark a $1.3 billion decline from last year, due in part to $615 million in payments for legal matters and a $379 million pension plan premium.

Looking ahead, the company narrowed its fiscal 2024 guidance range for adjusted EPS to $3.20 to $3.35 from $3.20 to $3.50, which lowered the midpoint of guidance to $3.28 from $3.35.

The stock, which was removed from the Dow Jones Industrial Average a month ago, has dropped 18.4% year to date, while the S&P 500 has gained 10.1%.

-Tomi Kilgore

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03-28-24 1207ET

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