Walgreens plans to close many of its stores in the United States. Targeting underperforming stores, the closures are due to continuous struggles with profitability and declining margins. These closures are part of Walgreens’ ongoing effort to optimize its store network. Although the number of stores to be closed has not been disclosed, CEO Tim Wentworth indicated that a substantial portion of the underperforming stores would close.

The company is adjusting its store presence, with approximately 25% of its 8,700 locations deemed non-contributory to its long-term goals. Walgreens’ stock price fell in pre-market trading on Thursday following a reduction in its profit forecast for 2024. The stock has declined over 45% in the past year.

Key Takeaways

• Strategic Store Closures: Walgreens is undertaking significant store closures across the United States to address profitability challenges and declining margins. Approximately 25% of its locations are targeted for closure, reflecting a strategic effort to optimize its store network amidst challenging market conditions.
• Financial Impact and Market Response: The announcement of store closures coincided with a sharp decline in Walgreens’ stock price, highlighting investor concerns over the company’s profit forecast for 2024. Despite recent sales and operating income improvements, Walgreens continues to navigate substantial losses from previous years.
• Industry-wide Challenges: Like its competitors, Walgreens faces industry challenges such as reduced profits from prescription services and heightened competition from larger retail chains and online platforms like Amazon. Adjustments in product offerings and strategic shifts towards house brands aim to enhance profitability and competitiveness in the retail pharmacy sector.
• Future Strategic Focus: Looking ahead, Walgreens is prioritizing its core retail pharmacy business while exploring new payment structures with insurers and benefit managers. Despite ongoing market uncertainties and competitive pressures, this strategic realignment underscores its commitment to sustainable growth and operational efficiency.

Walgreens’ Strategic Restructuring Amidst Challenging Market Conditions

Walgreens intends to shut down many of its underperforming stores throughout the United States as part of a strategy to mitigate losses. This move was announced alongside the company’s third-quarter earnings in a press release that received an adverse reaction from Wall Street. Following the announcement, Walgreens’ stock price fell more than 20% due to difficult trends in the pharmacy sector and a tougher-than-expected consumer environment in the U.S.

The decision to close these struggling stores aims to improve the company’s performance as it enters a new quarter. However, the specific number and locations of the stores to be closed were not revealed. However, the decision to close stores will be based on each store’s profitability and shrink levels, consumer behavior, and local competition. Walgreens may also close stores that are near another Walgreens location. The company plans to reassign nearly all employees affected by these closures to other stores to prevent widespread job losses.

A Walgreens representative stated that about 25% of its stores are not aligned with the company’s long-term goals, and a substantial number of these stores are expected to close within the next three years.

CEO Wentworth stated in a press release that the company is dealing with a challenging operating environment, facing ongoing pressures on the US consumer and recent market dynamics that have reduced pharmacy margins. He noted that these factors are reflected in the company’s results and projections. Inflation has significantly impacted the drugstore business, affecting both the retail and pharmacy ends. Wentworth also mentioned that consumers are becoming more selective and sensitive to prices. He added that he expects the challenging conditions in the US to persist without foreseeable improvement.

The company indicated it might consider further store closures if profitability does not improve.

Walgreens reported a 2.6% increase in sales to $36.4 billion and a quarterly operating income of $111 million, a significant improvement from a $477 million loss last year. Boots Alliance also reported net earnings of $344 million for the quarter. However, the company is still addressing earlier losses from this year, with an operating loss of $13.1 billion and a net loss of $5.6 billion, up from $2.9 billion year over year.

Sales in the US retail pharmacy segment grew by 2.3% YOY to $28.5 billion, and U.S. healthcare sales increased by 7.6% to $2.1 billion for the quarter. VillageMD and Shields contributed to this growth, with sales up 7% and 24%, respectively, from last year. Notably, Walgreens is reducing its stake in VillageMD and has shifted its strategy away from investing in medical offices. Last year, Walgreens began reducing VillageMD’s footprint to boost the division’s profitability. Earlier this year, Walgreens intensified its cost-saving efforts by increasing the number of VillageMD clinic closures, although its strategy has since evolved.

Furthermore, the U.S. healthcare business reduced its operating losses from $522 million last year to $220 million in the third quarter.

Wentworth added that guided by its strategic review, its focus is on enhancing its core business, retail pharmacy, which is crucial to the future of healthcare. They are urgently addressing key challenges and striving to create growth opportunities. While many of these initiatives will require time, he expressed confidence in having the right team and strategy to drive a turnaround for Walgreens, which their customers and patients rely on.

Adapting to Industry Challenges

Walgreens’ competitors like Rite Aid and CVS have also encountered significant difficulties, primarily driven by reduced profits from their prescription filling operations. These issues arise from lower reimbursement rates for prescription drugs and heightened competition from new market players like Amazon, which has expanded into prescription services via its online platform.

Additionally, these chains face competition at the front end of their stores—areas selling daily necessities like snacks and household items—from larger retailers like Target and dollar stores, which generally offer lower prices and greater convenience.

Walgreens is adapting its strategy to address these industry-wide issues. The company is modifying its product selection by discontinuing eight national brands in favor of its house brands and selecting “preferred partners,” especially in health and wellness categories. This adjustment aims to sharpen their focus and improve profitability in their retail operations.

Despite these ongoing challenges, drugstores saw a temporary increase in business during the pandemic, spurred by the demand for COVID-19 vaccines and a general rise in health consciousness. Nevertheless, this surge did not fully mitigate the persistent decline in in-store visits and prescription volumes, which were also affected by a decrease in elective medical procedures.

What Does the Future Hold for Walgreens?

Continuing forward, Walgreens is concentrating its approach once again on its main line of retail pharmacies. The firm intends to launch a retail pharmacy action plan to improve customer experience in its stores, better integrate its pharmacy and healthcare operations, and focus on products that sell—particularly in women’s health.

Furthermore, Walgreens is attempting to stabilize an unstable reimbursement environment by modifying the payment structure for its pharmacies through negotiations with pharmacy benefit managers and health insurers. This measure is similar to what its national rival CVS did last year to boost sluggish income by changing how it paid for prescription medications. According to Wentworth, the present pharmacy approach is unworkable.

Walgreens is not giving up on the healthcare industry entirely, either. The business does not intend to sell its specialist pharmacy, Shields Health Solutions, or Boots drugstore network in the United Kingdom. As previously said, Shields helped the division record a second straight quarter of positive adjusted profitability during the third quarter by continuously supporting expansion in the US healthcare industry.

Walgreens has been cutting costs, as evidenced by the large number of corporate employees it let go at the end of last year. It has also recently sold off other healthcare assets, such as its shares in drug distributor Cencora and home infusion provider Option Care Health.

About Walgreens

Walgreens Co., established in 1901 by Charles R. Walgreen Sr., is a U.S.-based drugstore chain headquartered in Deerfield, Illinois. The company operates numerous stores nationwide, offering prescription and over-the-counter drugs, general merchandise such as household items, food, personal and beauty care products, photofinishing services, and candy.

The company offers various nationwide pharmacy services, including retail and specialty pharmacy, infusion and respiratory services, mail services, and clinics in convenient places and workplaces. Walgreens specializes in managing complex and chronic health conditions through these services. It provides infusion therapy for conditions like cancer, chronic pain, heart failure, and other infections, which can be administered at homes, workplaces, physician offices, or at Walgreens’ alternative treatment sites.

Walgreens’ advanced pharmacy system improves pharmacists’ ability to access patient records, assisting with prescription refills, emergency supplies, prescription transfers, and consultations for ongoing treatment. The company also operates websites that sell products from beauty and personal care items to home medical equipment and health supplements.

Conclusion

Walgreens’ decision to close many underperforming stores underscores its commitment to strategic optimization amidst challenging market conditions. With a clear focus on enhancing profitability and aligning with long-term goals, these closures are part of a broader effort to streamline operations and navigate a complex economic landscape. CEO Tim Wentworth’s proactive approach reflects a necessary adaptation to sustain competitiveness and drive future growth in the retail pharmacy sector.

As Walgreens continues to refine its business strategy and prioritize core operations, including innovative healthcare services, the company remains poised to navigate ongoing challenges and capitalize on emerging opportunities in the evolving healthcare marketplace.