(Source – Barron’s)
Walgreens Boots Alliance (WBA) experienced its worst trading day in over four decades, with its stock plummeting 22% on Thursday to close at $12.19 per share. This drastic decline followed the announcement that the company had slashed its profit guidance for the second time this year. Walgreens now forecasts earnings per share (EPS) between $2.80 and $2.95, a significant reduction from the previous quarter’s guidance of $3.20 to $3.35.
The market is closely monitoring CEO Tim Wentworth’s new strategy, which focuses on revitalizing pharmacies and reducing involvement in healthcare services through VillageMD, a company in which Walgreens is no longer a major stakeholder.
Strategic Shifts and Market Challenges
As part of its restructuring efforts, Walgreens is downsizing unprofitable segments, including announcing additional store closures. The company is also grappling with pricing pressures from prescription drugs, a challenge faced by many smaller pharmacies.
“The current pharmacy model is not sustainable, and the challenges in our operating environment require us to approach the market differently. We are in active discussions to align incentives and ensure we are paid fairly,” Wentworth stated during Thursday’s earnings call.
Company officials expressed concern over the role of pharmacy benefits managers (PBMs) in setting prescription prices, which has squeezed profit margins. Branded drugs, such as Eli Lilly’s Mounjaro and Zepbound, and Novo Nordisk’s Ozempic and Wegovy, yield lower profits for pharmacies compared to generics. However, the supply of generics has been decreasing due to ongoing shortages, further impacting profits.
Walgreens Boots Alliance noted that 100% of its profits come from 75% of its stores, though the company has not specified how many of the remaining 25% will close. Wentworth emphasized the importance of avoiding the creation of pharmacy deserts — areas with no access to community-based pharmacies.
“We know we are the last thing standing in a lot of areas,” Wentworth said, acknowledging that Walgreens often prevents communities from becoming no-pharmacy zones.
Walgreens shares slump after missing earnings estimates and slashing guidance
Addressing Broader Retail Challenges
In addition to the pressures from prescription drug pricing, Walgreens is also dealing with retail shrinkage and inflation, which have reduced customers’ discretionary spending. This has prompted the company to rethink its product offerings, shifting towards limited partner brands and Walgreens’ in-house brand.
During the earnings call, company officials outlined their future strategy, which includes maintaining clinical trials, incentivizing store managers, and building up specialty pharmacy services. The goal is to funnel resources efficiently without detracting from shareholder value and to bolster profits.
Walgreens’ recent financial difficulties underscore the broader challenges facing the pharmacy sector. The combination of unsustainable pharmacy models, the impact of PBMs, and broader economic pressures have necessitated significant strategic shifts for the company. Wentworth’s approach aims to navigate these challenges by focusing on sustainability and fair compensation for services rendered.
As Walgreens Boots Alliance implements these changes, the company’s ability to balance short-term challenges with long-term growth will be critical. The historic stock drop highlights the urgency and importance of the effective execution of this new strategy. Investors and analysts alike will be closely watching how Walgreens adapts to the evolving healthcare and retail landscape in the coming months.
