Walgreens Reports Q2 Sales Beat Expectations but Cuts Outlook Amid Challenging Retail Environment

Walgreens Reports Fiscal Second-Quarter Sales

Walgreens announced its fiscal second-quarter sales results. The company managed to surpass Wall Street's expectations, reporting sales of $37.05 billion against the expected $35.86 billion. However, it also observed a decline in its full-year adjusted earnings forecast at the high end due to challenges within the U.S. retail environment.

Net Loss and Transformation Efforts

During the quarter, Walgreens recorded a significant net loss primarily attributed to a hefty goodwill impairment charge of nearly $6 billion related to its VillageMD primary-care provider. As part of its transformation strategy from a major drugstore chain to a large health-care company, Walgreens has been shutting down numerous VillageMD clinics. The company views this transition as crucial to its overall growth and sustainability.

CEO's Cost-Cutting Measures

Tim Wentworth, the new CEO of Walgreens, has been proactive in implementing cost-cutting strategies to navigate the challenging business landscape. The company experienced a 30% decline in its shares the previous year due to various factors such as reduced demand for Covid products, low pharmacy reimbursement rates, and difficulties in expanding its health care services amidst the turbulent macroeconomic conditions.

Financial Outlook

Walgreens has set a target to achieve $1 billion in savings by the end of fiscal 2024 through an ongoing cost-cutting initiative. It has initiated workforce reductions, closed unprofitable stores, and leveraged artificial intelligence to enhance its supply chain efficiency as part of this program.

Quarterly Performance Summary

For the quarter in review, Walgreens reported the following key figures:

• Earnings per share: $1.20 (adjusted)
• Revenue: $37.05 billion

The company also revised its fiscal 2024 adjusted earnings guidance to a range of $3.20 to $3.35 per share, compared to the previous outlook of $3.20 to $3.50 per share.

Challenges and mitigating factors

Walgreens attributed its adjusted earnings forecast revision to the complexities faced by retailers in the U.S. and the early conclusion of sales-leaseback programs. Additionally, it considered the impact of lower earnings resulting from the forward sale of shares of drug distributor Cencora, formerly known as AmerisourceBergen. Despite these challenges, the company highlighted a stronger performance in its pharmacy services segment and a lower adjusted effective tax rate, which helped offset the adverse impacts on its earnings.

Segment Performance

During the fiscal second quarter, Walgreens observed a 6% revenue growth, driven by robust sales across its three business segments. The U.S. health-care division notably stood out with a 33% sales increase, generating $2.18 billion in revenue. This growth was attributed to VillageMD's acquisition of multi-specialty care provider Summit Health, as well as overall business expansion within the segment.

VillageMD's sales grew by 20%, primarily due to same-clinic growth, while sales from Shields Health Solutions, the specialty pharmacy company, saw a 13% increase owing to new contracts and the expansion of existing partnerships.

The U.S. retail pharmacy segment, operating over 8,000 drugstores, reported sales of $28.86 billion, representing nearly 5% growth from the previous year. The company noted an 8.2% increase in pharmacy sales and a total of 305.7 million prescriptions filled in the quarter, including immunizations.

Conversely, retail sales dropped by 4.5% from the previous year, mainly attributed to a challenging retail environment and a weaker respiratory season. The international segment, with over 3,000 retail stores abroad, posted $6.02 billion in sales, marking a 6% increase from the prior-year period. Sales from its U.K. subsidiary, Boots, also experienced a 3% growth.