Walgreens is set to close a substantial number of its roughly 8,600 locations across the United States as the company looks to reset the struggling pharmaceutical chain’s business.
The company didn’t announce a specific number of store closures, but it said Thursday that it is planning “significant” closures of underperforming stores across America as part of a multiyear optimization program.
CEO Tim Wentworth said on a call with analysts Thursday that “changes are imminent” for the roughly 25% of stores that aren’t profitable and Walgreens’ strategic review will “include the closure of a significant portion of these underperforming stores.”
“We are at a point where the current pharmacy model is not sustainable and the challenges in our operating environment require we approach the market differently,” he said.
In an interview with the Wall Street Journal Thursday, Wentworth said the closures would focus on locations that aren’t profitable, too close to each other or stores struggling with theft.
Walgreens revealed few additional details about the closures on the call, but said they would take place over the next three years. The company also said it will consider additional closures if performance doesn’t improve. The “vast majority” of employees working at affected stores will be offered jobs elsewhere, Wentworth said.
Stock plunges on weak outlook
Walgreens’ (WBA) shares fell 20% to its lowest level in decades. The company also said in its earnings statement that it has slashed its full-year profit outlook.
“We continue to face a difficult operating environment, including persistent pressures on the US consumer and the impact of recent marketplace dynamics which have eroded pharmacy margins,” Wentworth said in a press release. “Our results and outlook reflect these headwinds.”
Inflation has taken a big bite out of the drug store business – both at the front-end and the back-end of pharmacies.
Shoppers are “becoming increasingly selective and price sensitive on their selections,” Wentworth said on the call, adding that he forecasts the “operating environment to remain challenging” in the US and doesn’t “expect an improvement.”
Sales rose 2.6% to $36.4 billion for the quarter. That might not “look unreasonable, but this is running below inflation and, across some segments of the business, represents a loss of market share,” Neil Saunders, managing director of GlobalData, said in a note.
Particularly concerning for Walgreens was its retail sales falling 4% for the quarter. But that isn’t surprising because it’s front-of-store struggles have been “exacerbated by the cost-of-living crisis which has seen customers curtailing the volume of products they buy and shopping around more for the best deals and bargains,” Saunders added.
Walgreens slashed prices on more than 1,000 items in May, following rivals in an effort to lure back inflation-weary shoppers turned off by high prices. But the company said Thursday that would hurt its profitability.
Struggles for drug stores
Major drugstore chains, including CVS (CVS) and Rite Aid, have struggled in recent years because of declining profits from filling prescriptions. They’ve declined because of lower reimbursement rates for prescription drugs and new competition from Amazon.
The front end of drugstores, where they sell snacks and household staples, also face pressure from larger competitors, including Target and dollar stores.
Wentworth said in the call that Walgreens’ store assortment will change and it has removed eight national brands and instead started selling similar items produced by its house brands or “preferred partners.” He didn’t specify which brands that have been eliminated, but said it was within the health and wellness categories.
Although drugstores benefited during the pandemic from people getting Covid-19 vaccines, fewer consumers are visiting stores to shop. Prescription volumes are also falling because people are getting fewer elective procedures.
GLP-1 drugs, which include Ozempic and Mounjaro to treat weight loss and diabetes hasn’t been a boon for the chain. Wentworth told the Journal it’s losing money on filling those prescriptions.
Pivoting the business model hasn’t helped, either. Walgreens will no longer have a majority stake in VillageMD, a primary care network that the chain once had major plans to open full-service doctors’ offices in hundreds of its stores. Walgreens said the value of its ill-fated VillageMD merger has fallen so much, it was forced to take a massive $6 billion writedown on its balance sheet.
In the past few years, CVS has closed about 900 locations and Rite Aid, which entered bankruptcy in October, closed more than 100.
–CNN’s Nathaniel Meyersohn contributed to this report.
