Walgreens to Cut Costs Sharply as Drugstore Faces Challenges

(Bloomberg) -- Walgreens Boots Alliance Inc. shares declined Thursday after mediocre quarterly results and a new cost-cutting plan that raised concerns about how the pharmacy operator is going to grow over the long term.

The company’s results in the most recent quarter were a mixed bag, with adjusted earnings stronger than Wall Street expected but sales slightly trailing estimates. Analysts said much of the earnings beat was due to lower-than-anticipated taxes. At the same time, Walgreens unveiled a plan to save $1 billion a year within three years -- an effort it expects to lead to significant restructuring and other charges.

Walgreens shares were down 3.5 percent to $70.73 at 11:29 a.m. in New York.

“Another underwhelming report,” said Eric Coldwell, an analyst at Robert W. Baird & Co., in a note to clients. Sales of retail items such as shampoo and beauty products in the U.S. were weaker than anticipated and international drugstore results were “especially bad,” said Coldwell, who has a neutral rating on Walgreens shares.

Walgreens faces pressure on numerous fronts. Competitor CVS Health Corp. bought insurer Aetna Inc. last month and plans to add new health services in its stores. And digitally focused competitors are entering the pharmacy market, including a batch of small venture-backed startups and online behemoth Amazon.com Inc.

The pharmacy chain is trying to get ahead of these competitive threats with several collaborations, including a new partnership with an Alphabet Inc. unit on health projects. It is testing out new beauty spaces with products from Birchbox Inc. in some stores. In others, it is piloting senior-focused clinics with insurer Humana Inc. Earlier this month, Walgreens said it will start nationwide next-day prescription delivery.

Many of the collaborations are in the early stages, however, and Walgreens is a long way from turning its stores into health-care hubs.

“It will take years” to transform the stores, Chief Executive Officer Stefano Pessina said on a call with analysts. “Whether this will be three or five is difficult to say because many of these tests take a lot of time to come to a real fruition.”

In the quarter, prescriptions in the U.S. increased sharply, jumping 11.4 percent from a year ago as Walgreens absorbed stores it bought from Rite Aid Corp. But on a comparable basis, prescriptions increased just 2 percent. Meanwhile, same-store retail sales were down 3.2 percent in the U.S. Walgreens blamed the decline in part on de-emphasizing tobacco.

Walgreens and health insurer Humana Inc. have been reported to be in early talks about taking equity stakes in one another. Neither company has confirmed the talks.

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