Walgreens slashes financial outlook, ramps up efforts to drive profitability in healthcare unit

Drugstore chain Walgreens reported third-quarter sales were up nearly 9% to reach $35.4 billion, but the company slashed its profit outlook for the year as it faces lower consumer spending and a drop in COVID-19 tests and vaccines.

"We've been impacted by the rapid softening of the macro environment and a more cautious and value-driven consumer. Our customer is feeling the strain of higher inflation and interest rates, lower SNAP benefits and tax refunds and an uncertain economic outlook. They are pulling back on discretionary and seasonal spend," CEO Rosalind Brewer told investors during the company's third-quarter earnings call Tuesday.

A weaker respiratory season, meaning fewer patients coming in with colds and flu, also led to a drop in visit volume at the company's CityMD clinics and fewer patient referrals across its Summit Health network, executives said during the earnings call.

For the latest quarter, Walgreens brought in a net profit of $118 million, or 14 cents per share unadjusted, down 59% from a net profit of $289 million, or 33 cents per share, during the same quarter a year ago. The decline was primarily driven by lower operating income, the company said in its earnings report.

Earnings per share adjusted to exclude one-time items came in at $1, missing analysts’ expectations of $1.09, according to FactSet.

The retail pharmacy giant cut its earnings guidance for the year to $4.00 to $4.05 from its previous outlook of $4.45 to $4.65 to reflect consumer and category conditions, lower COVID-19 contribution and a more cautious macroeconomic forward view, executives said.

Shares of Walgreens fell 9% Tuesday.

Brewer told investors and analysts she was not satisfied with the guidance revisions announced Tuesday but believes Walgreens has the "right strategy" to drive growth.

"Our revised guidance takes an appropriately cautious forward view in light of consumer spending uncertainty, while still demonstrating clear drivers of a return to operating growth next fiscal year," she said.

Brewer said the company is increasing its cost-cutting initiative from $3.5 billion to $4.1 billion, including $800 million in savings in fiscal year 2024.

Walgreens' revenue growth in the third quarter was driven by its U.S. retail pharmacy and healthcare businesses. 

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.

Walgreen's 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.

Its healthcare business unit brought in $2 billion in sales in the third quarter, up 22% on a pro forma basis from $1.4 billion a year ago. 

VillageMD, including Summit Health, grew pro forma sales by 22%, reflecting existing clinic growth and clinic footprint expansion. Shields grew 35%, driven by recent contract wins and further expansion of existing partnerships, executives said. CareCentrix grew 15% as a result of additional service offerings with existing partners, the company reported.

VillageMD now manages approximately 850,000 patients under value-based contracts, the company reported.

But the healthcare segment took an adjusted EBITDA loss of $113 million in the quarter, reflecting new clinic expansions at VillageMD and fewer patient visits at CityMD clinics.

"While we're confident in the range and scale of our healthcare business, we are disappointed with the pace of our path to profitability," John Driscoll, executive vice president and president of U.S. healthcare, said during the earnings call. "U.S. healthcare missed targets due to VillageMD and CityMD underperformance directly related to reduced COVID, cold and flu season and softer market demand. We're taking immediate action to drive improved profitability. We anticipate this will be a transition year as we take action to deliver value and drive profitability."

Brewer said Walgreens is ramping up efforts to increase profitability in its healthcare business. 

"We are announcing several specific actions to accelerate U.S. healthcare's path to profitability focused on VillageMD and Summit Health. We are also accelerating the synergies between our U.S. healthcare segment and our core Walgreens business," she said.

The company now has an accelerated synergy target for VillageMD/Summit Health of $200 million by calendar year 2026.

"In partnering with VillageMD, our team-based healthcare delivery enhances adherence. We're building digital connections and standalone clinics. More than 30 in Arizona and Texas are now supported by Walgreens pharmacies virtually with more coming online in Georgia this summer. To make the virtual experience seamless, we're piloting a healthcare concierge program to provide extra care coordination. We are also exploring an integrated pharmacist ambulatory care model," Brewer said.

That pilot initiative has driven more than 40% reduction in hospital readmissions over 30 days and the material A1c reduction in diabetic patients, she said.

Driscoll said Walgreens has slowed the pace of new VillageMD clinic openings and refocused growth plans to leverage regional density to support more profitable growth. The company also is launching new "virtual and asset-light" care models with a focus on better engagement and lower cost of care in a more cost-effective manner, he said. 

Walgreens also is exploring new healthcare service lines, such as additional diagnostic services and data analytics and insights, Brewer noted. "We've already seen strong results with our at-home testing programs, such as the one we conducted last fall with Blue Shield of California to boost patient access to colorectal cancer screening," she said, noting that test completion rates were 50 percentage points higher when members chose pharmacy pickup compared to those that received a kit in the mail.

"Based on the successful results, we are launching similar at-home testing programs with other payer partners," Brewer said.

The company's U.S. retail pharmacy sales increased 4.4% to reach $27.9 billion during the third quarter. Pharmacy sales were up 6.3% compared to the same period a year ago.

Total prescriptions filled in the quarter, including immunizations, increased by only 0.1% to 305 million. Walgreens administered 800,000 COVID-19 vaccinations in the quarter, down 83% from 4.7 million COVID shots in the year-ago quarter.

"We had called out COVID as a wildcard heading into the quarter and have unfortunately seen less patient willingness to vaccinate," Brewer said during the earnings call. "We are currently projecting to administer nine to 10 million COVID vaccines next year, in line with a typical flu season and compared to 12.5 million COVID vaccines expected in fiscal 2023."

Walgreens also expanded into clinical trials a year ago. The drugstore chain now has eight contracts signed and has, to date, reached out to 1 million patients for potential participation in trials, executives said Tuesday.