Walgreens Is Paying A Hefty Cost For Its Healthcare Transformation But It's Not Giving Up Despite Scary Competition From Amazon

Like Amazon.com Inc AMZN, Walgreens Boots Alliance WBA is going for its piece of the healthcare pie. With its fiscal second quarter report, it topped estimates, but lowered the higher end of its full-year adjusted earnings guidance in response to a challenging macroeconomy. The new CEO, Tim Wentworth, continues to navigate the company out of a rough spot by slashing costs and solidifying the leadership team, but the company's healthcare transformation took its toll on the bottom line.

Fiscal second quarter highlights

For the quarter ended on February 29th, Walgreens recorded sales grew about 6.3% to $37.05 billion, surpassing LSEG’s estimate of $35.86 billion as sales grew across its three business segments. U.S. retail pharmacy segment brought in $28.86 billion as revenue grew almost 5%. 

What particularly stood up is the U.S. health-care division whose sales expanded 33% YoY to $2.18 billion, owed to VillageMD’s acquisition of multispecialty care provider Summit Health and business growth on a pro-forma basis. Same clinic growth fueled VillageMD sales which grew 20%. New contracts and current partnershuip expansions fueled the segment’s specialty pharmacy company, Shields Health Solutions, to 13% growth. 

Adjusted earnings of $1.20 also topped LSEG’s estimate of 82 cents.

But due to a hefty nearly $6 billion charge related to the decline in value of its investment in primary-care provider VillageMD, Walgreens posted a steep net loss of  $5.91 billion, or $6.85 per share, swinging from last year’s comparable quarter for which it made a net income of $703 million, or 81 cents per share.

The net loss reflected the hefty cost Walgreens is paying for its transformation from being a major drugstore chain into becoming a large health-care company. However, CFO Manmohan Mahajan emphasized that VillageMD chargeis not expected to have a significant impact on the company’s financial position, or its ability to invest across businesses going forward.

Outlook

Walgreens narrowed its prior fiscal 2024 adjusted earnings guidance range from $3.20 to $3.35 per share, lowering the higher end from $3.50 per share due to hurdles retailers are facing amid an unfavorable economy, among other factors.

Walgreens is reshaping its strategy along the way.

Walgreens has been having a hard time over the last few years, and the battle is to become even harder with Amazon announcing its entry into the immediate delivery pharmacy market. Amazon announced the expansion of same day delivery service for Amazon Pharmacy in New York and Los Angeles. But, getting a piece of the $4.5 trillion healthcare industry doesn’t not come easy even for Amazon. Even the mighty e-commerce titan found its primary care strategy difficult to scale. 

Last year, Walgreens shares tanked 30% last year in response to plummeting demand for Covid products, low pharmacy reimbursement rates, along with its unsteady push into health care amid an unstable U.S. economy. With the ongoing cost savings program that includes trimming its workforce, closing unprofitable stores and using AI to boost the efficiency of its supply chain, Walgreens reiterated it is on track to meet its goal of saving $1 billion during fiscal 2024, as it continues seeking innovative ways to boost profitability and growth of its retail pharmacy division. With Amazon’s latest move, Walgreens’ challenges only got worse.

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