Walgreens to close 60 VillageMD clinics as part of aggressive cost-cutting strategy

Drugstore chain Walgreens plans to close 60 underperforming VillageMD clinics and exit five markets as part of an aggressive $1 billion cost-saving strategy as it looks to boost profitability in its healthcare business.

The pharmacy retail giant posted weaker-than-expected fourth-quarter earnings and offered a soft profit outlook for 2024 amid falling demand for COVID-19 vaccines and testing in the U.S. and lower consumer spending.

Walgreens reported fourth-quarter sales were up 9% to reach $35.4 billion, and the company reported a loss of $180 million during the quarter, according to its fourth-quarter and fiscal 2023 earnings. Walgreens said it had a loss of 21 cents per share. Earnings, adjusted for one-time gains and costs, were 67 cents per share, down 18.8% from the same time a year ago and 2 cents shy of the Wall Street consensus forecast. 

For the year, its fiscal 2023, Walgreens posted revenue of $139 billion, up 5% year over year, and a loss of $3.08 billion, or $3.57 per share. 

“Our performance this year has not reflected WBA’s strong assets, brand legacy, or our commitment to our customers and patients," said Ginger Graham, interim CEO, in a statement.

"In just six weeks, we have taken a number of steps to align our cost structure with our business performance, including planned cost reductions of at least $1 billion, and lowered capital expenditures by approximately $600 million. We anticipate seeing the impact of these actions in fiscal 2024, beginning in the second quarter," she said.

Walgreens expects fiscal 2024 adjusted earnings per share of $3.20 to $3.50, compared with a Wall Street forecast of around $3.70, and its forecast 2024 revenue to be in the range of $141 billion to $145 billion.

The company expects adjusted EBITDA for its healthcare business to be break-even at the midpoint of its guidance range of a loss of $50 million to a profit of $50 million in 2024. It noted that it will not provide an outlook into 2025.

Shares of Walgreens rose 7% Thursday as it outlined its aggressive cost reduction plan and noted that AI technologies could help streamline its supply chain processes.

Graham, the lead independent director of the company, stepped in as interim CEO after Rosalind Brewer stepped down from the role in early September. Just this week, the company announced that it was bringing in former Express Scripts CEO Tim Wentworth to take the helm.

Wentworth served most recently as the first CEO of Evernorth, Cigna's healthcare services business line that was established following its blockbuster $67 billion acquisition of pharmacy benefit management giant Express Scripts. 

During the company's fourth-quarter earnings call Thursday, Wentworth said he understands the "challenges ahead" for Walgreens as well as "for the healthcare industry." 

"Walgreens is built on convenience, access and trust and has unique advantages in today's healthcare environment. I see the opportunities before us to build on our pharmacy strength and our trusted brand to evolve healthcare and the customer experience to deliver better outcomes at a lower cost," he said during the call.

"I know WBA [Walgreens Boots Alliance]. I have worked with Walgreens as a customer, partner, competitor, investor and family member," he said. "There is a reservoir of goodwill for this company across communities and a substantial opportunity to return value to our customers, employees and shareholders. Alongside the board, our team members and partners. I'm enthusiastic about our future and realizing our healthcare strategy and vision."

During the call, Graham said Walgreens was focused on three near-term operational priorities—supporting customer-facing activities, "scrutinizing every penny of spend that does not directly benefit the customer" and improving cash management.

"I will restate what we know and is critical to our future: We believe the fundamentals of our core business remain strong. We dispense over a billion prescriptions annually across our retail and specialty pharmacies. We play a key role in healthcare delivery in this country. Seventy-eight percent of Americans live within five miles of a Walgreens or Duane Reade, and 58% of us are likely to visit a local pharmacy as the first step for a nonemergency health need. Our trusted brand, deep community relationships and convenience form the foundation of our pharmacy business and our platform for growth as we expand throughout other areas of healthcare. I see significant opportunity to improve the cost base of this business," she told investors and analysts on the call.

Its healthcare business unit brought in $1.9 billion in sales in the fourth quarter, reflecting the acquisition of CareCentrix, the acquisition of Summit Health by VillageMD and pro forma growth in all businesses. On a pro forma basis, the segment's businesses grew sales at a combined rate of 19% in the quarter, the company reported.

The company's U.S. retail pharmacy sales increased 3.7% to reach $27.7 billion during the fourth quarter. Pharmacy sales were up 6.4% compared to the same period a year ago. Retail sales decreased 4.3% on a year-to-year basis.

The company's healthcare segment includes primary care provider VillageMD; Summit Health/CityMD, a provider of primary, specialty and urgent care; CareCentrix, a post-acute and home care provider; specialty pharmacy Shields Health; and Walgreens Health.

Walgreens' VillageMD bought the urgent and primary care chain, Summit Health-CityMD, in a deal worth close to $9 billion. The combined entity is one of the largest independent provider groups in the U.S. operating more than 680 provider locations in 26 markets. Walgreens also bought CareCentrix this year, which currently manages care for more than 19 million members through over 7,400 provider locations. The company also closed its acquisition of Shields Health Solutions in December.

Recently, Walgreens announced it was partnering with startup Pearl Health to support providers transitioning from fee-for-service to value-based care models.

VillageMD revenue grew 17%, reflecting existing clinic growth and clinic footprint expansion. CareCentrix grew pro forma sales by 24% due to additional service offerings and expansion into additional markets with existing partners. Shields grew 29%, driven by key contract wins and further expansion of existing partnerships, the company reported.

The healthcare segment posted a fourth-quarter adjusted EBITDA loss of $30 million improved by $103 million versus the prior year quarter. Improvement in adjusted operating loss versus the year-ago quarter was driven by growth at Shields and CareCentrix as well as cost management at Walgreens Health, the company reported.

Walgreens is "intently focused" on accelerating profitability in its U.S. healthcare segment, Graham said during the earnings call.

“We expect fiscal 2024 sales of $8.3 to $8.8 billion reflecting the first full year of Summit Health and ongoing growth in all businesses," interim Chief Financial Officer Manmohan Mahajan said during the call. "On a pro forma basis, we see sales growth of 10% to 17% and expect fiscal 2024 adjusted EBITDA to be break-even at the midpoint of the guidance range. This represents an increase of $325 [million] to $425 million compared to fiscal 2023, driven by growth in full-risk lives, fee-for-service volume, optimization of the clinic footprint and realignment of the cost base at VillageMD, robust growth at Shields and Walgreens Health business growth driven by scaling of our clinical trial business and healthcare services and through cost management."

Walgreens expanded into clinical trials a year ago. The drugstore chain now has 15 contracts signed, executives said Thursday.

John Driscoll, president of the U.S. healthcare business, said the healthcare segment has ramped to an $8 billion sales run rate in just two years. "While we have made progress on the build-out of our healthcare business, we are not satisfied with the near-term returns on our investments," he said. 

VillageMD, Summit Health and CityMD will be the most "meaningful drivers of growth" in fiscal 2024, he said.

But Driscoll noted that it has taken "longer than anticipated" to realize the cost synergies across the combined assets. "We also need to solve for a less efficient cost profile and excellence in execution. We believe that we can best enhance VillageMD growth and value by focusing on increased density in our highest opportunity markets and expanding integration of our digital assets," he said.

Walgreens plans to exit approximately five markets and close 60 clinics in fiscal 2024.

"These exits may take a variety of forms, including outright sales and hybrid equity arrangements as examples. As we exit these non-strategic markets, our long-term focus will be on achieving density in those regions with the greatest potential to drive future profitability growth and where we can best serve patients with our consolidated set of assets," Driscoll said.

"We will continue to grow in 2024 but with a renewed focus on more profitable growth," he added.

The company announced during the HLTH 2023 conference that it is rolling out virtual healthcare services later this month for common health needs like urgent care, birth control and seasonal allergies, starting in nine states.

The cost reduction plan is one piece of Walgreens' strategy to manage the financial performance of its VillageMD and Summit Health businesses, Driscoll said during a Q&A with analysts.

"It's really a three-pronged strategy. We are right-sizing the footprint and getting our expenses in the right place. There are revenue synergy opportunities, and we're seeing consistent growth in core revenues which indicates that there's some opportunity on the margin side which we are quickly getting after. And then the rest of U.S. healthcare, actually we're seeing substantial growth and building profitability in CareCentrix, Shields, our analytics business and our U.S. healthcare business. Clinical trials is doing quite well. As a portfolio, we are very confident in our ability to perform in '24. To look at those revenue numbers, we've got the revenues, now we're going to get at, more effectively, some of the embedded profits," he said.