Walgreens Earnings Slide as It Faces More Competitors
Walgreens Earnings Slide as It Faces More Competitors
(Bloomberg) -- Walgreens Boots Alliance Inc. hopes to be one of the survivors in the brutal shakeout that’s roiling the pharmacy sector. But it’s off to a slow start in 2020.
The company’s shares fell the most in nine months on Wednesday after the drugstore giant posted first-quarter results that fell short of Wall Street expectations. The report deepened a slump that saw the retailer become the worst performer on the Dow Jones Industrial Average in 2019, when reports also emerged that Walgreens was considering a leveraged buyout.
On a long conference call with analysts that focused on mundane details of cost cutting and pharmacy contracts -- even including comments by one executive on how LED lighting can save money -- Chief Executive Officer Stefano Pessina eventually came back to the bigger challenge facing Walgreens.
“Not all the pharmacies will survive in the future,” Pessina said, without elaborating. The company could do a deal that would hide the broad problems afflicting the pharmacy sector in the short term. Instead, it’s focusing on the long term, Pessina said.
Pessina, a multibillionaire who owns 16.5% of the company, and other executives made no mention on the call of the prospect that Walgreens could go private. In November, the chain was reported to be weighing a potential deal to go private that could be the largest LBO ever. Wall Street remains skeptical it will happen.
“Everyone believes that a transaction like this would be extremely complicated and tough to pull off,” said Eric Coldwell, an analyst with Robert W. Baird & Co., in an email.
In trading in New York, Walgreens shares dropped as much as 7.4%, the biggest intraday decline since April. In 2019, the stock fell 14%, compared with a gain of nearly 29% for the S&P 500 Index. The company has now given up most of the gains it made since early November, when news broke about the possible LBO.
Intense Shakeout
Some industry researchers have projected that the number of U.S. pharmacies is likely to shrink by thousands in the coming years amid an intense shakeout. Giant insurers are pressuring pharmacies on margins, at the same time as Amazon.com Inc. and host of small digital startups are trying to lure away brick-and-mortar customers.
“Pharmacies have been shuttering at a brisk pace -- small chains, grocers, independents,” said Coldwell. “Pharmacy is an extremely difficult marketplace.”
Walgreens and rival CVS Health Corp. are able to help themselves somewhat, by acquiring the pharmacy customers of some of those closing stores and then transferring the prescriptions to their existing stores, he said.
Walgreens itself has also closed stores. It disclosed plans in August to shut 200 U.S. locations on top of a previously announced cut of as many as 750 stores.
Earnings Details
- Adjusted earnings were significantly below Wall Street expectations, while net income declined sharply.
- Profit margins in flagship U.S. pharmacy business were eroded by reimbursement pressure. Gross profit in that unit declined 5.2% year over year.
- Company affirmed its 2020 guidance for roughly flat earnings.
- To read more on Walgreens’ financial results, click here.
- To read the company’s news release, click here.
To contact the reporter on this story: Robert Langreth in New York at rlangreth@bloomberg.net
To contact the editors responsible for this story: Drew Armstrong at darmstrong17@bloomberg.net, Mark Schoifet, Timothy Annett
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