Walgreens slashes profit guidance with plans to close more pharmacy stores, cut stake in VillageMD

Editor's note: A previous version of this story inaccurately reported Walgreens' plans for VillageMD. The story has been updated to reflect that Walgreens plans to reduce its stake in the primary care company. 

Walgreens' stock fell 24% Thursday morning as the drugstore chain slashed its profit outlook for 2024 amid a "challenging" environment for its pharmacy operations.

The company trimmed its full-year adjusted earnings guidance to between $2.80 and $2.95 reflecting "challenging pharmacy industry trends and a worse-than-expected U.S. consumer environment," Walgreens executives said Thursday. That compares with the company’s previous outlook of $3.20 to $3.35 per share announced during its second-quarter earnings call.

The company reported adjusted earnings per share of 63 cents, down 37% from the third quarter of 2023. The company's third-quarter profit fell short of Wall Street analyst expectations.

"We continue to face a difficult operating environment, including persistent pressures on the U.S. consumer and the impact of recent marketplace dynamics which have eroded pharmacy margins. Our results and outlook reflect these headwinds, despite solid performance in both our International and U.S. healthcare segments," Walgreens CEO Tim Wentworth said.

Manmohan Mahajan, Walgreens Boots Alliance chief financial officer, said the company expects to see some pharmacy headwinds continue in 2025.

Walgreens is plotting a financial turnaround that includes closing a "significant portion" of underperforming retail pharmacy stores in the U.S. over the next three years, Wentworth told investors during the company's fiscal 2024 third-quarter earnings call Thursday.

The retail pharmacy operator did not specify the number of closures among its 8,700 stores, but executives said the company's review was focused on a quarter of its stores. "Approximately 25% of Walgreens stores are not contributing to our long-term strategy," Wentworth told investors. The “vast majority” of employees working at affected stores will be offered jobs elsewhere, he said.

The pharmacy operator is taking a series of actions and making investments to enhance the customer and patient experience, executives said.

​"Our team is very clear that we are in a turnaround. We have a clear-eyed view of the things we need to do. We have gone very deep in understanding every part of this business and being realistic about the baseline we're resetting for growth," Wentworth said Thursday.

"I'm confident WBA will be a leader in the future of healthcare with pharmacy and retail at its center," he noted. 

The company also is evaluating its VillageMD business, after sinking $6 billion into the primary care provider. The VillageMD portfolio includes urgent and primary care chain Summit Health-CityMD after VillageMD bought those assets in a deal worth close to $9 billion in 2022.

Wentworth told The Wall Street Journal on Thursday that Walgreens will reduce its stake in VillageMD and will no longer be the company’s majority owner. 

"We believe in the future of these businesses [VillageMD, Summit Health and CityMD] and intend to remain an investor and partner, but as part of our persistent focus on value creation for Walgreens Boots Alliance, we are collaborating with leadership toward an endpoint to rapidly unlock liquidity, enhance optionality and position them for additional growth," Wentworth told investors.

Walgreens has been undergoing a strategic and operational review of its business, including the role of its retail pharmacy stores and its healthcare assets, as company leadership and the board plot the future direction of the company.

The drugstore retail giant is making moves to improve its financial performance and boost profitability after a massive growth spurt in which it acquired home healthcare business CareCentrix and VillageMD's acquisition of Summit Health-CityMD. 

"Informed by our strategic review, we are focused on improving our core business: retail pharmacy, which is central to the future of healthcare. We are addressing critical issues with urgency and working to unlock opportunities for growth," Wentworth said in a statement.

Walgreens' CEO cautioned investors that turning around the business would take time: "It's quarters, not months," he said. "We actually have a really strong level of conviction around the core business that we are remodeling here. It will be very different Walgreens, in a lot of ways, a different experience. But by the same token, we see a clear stabilization and actual growth path for that business." 

The drugstore chain invested $1 billion in VillageMD in 2020 and then sunk $5.2 billion into the primary care company in 2021, making it the majority owner with a 63% stake.

The company has taken steps to "right-size" the VillageMD footprint with plans to shutter 160 clinics. It's part of an aggressive $1 billion cost-saving strategy as Walgreens looks to boost profitability in its healthcare business. The company took a $5.8 billion noncash impairment charge related to its VillageMD investment in the second quarter.

In January, during the company's first-quarter earnings call, Wentworth said Walgreens was committed to its primary care business with VillageMD along with Summit Health and CityMD but does not plan to invest in additional brick-and-mortar primary care assets.

Mary Langowski, who was tapped to lead Walgreens' U.S. healthcare business back in February, told investors Thursday that the company will "double down" on areas with high growth potential that build Walgreens' core business.

"We are laser-focused on being extremely disciplined around where we will focus, what we will do, and importantly, what we'll stop doing. We're streamlining how we operate, as we discussed, around going to market with higher impact, how we develop services and how we partner across the industry with payers, health systems, at-risk providers, as well as pharma manufacturers," she said. "We'll stop things, and frankly, we already have stopped certain things that don't fit this lens or create near-term value. In some cases, we'll exit or restructure those things."

She continued, "We believe strongly in value-based care and in VillageMD. We believe in these businesses, and payers believe in these businesses, and consumers, frankly, love getting their care in these types of businesses. We'll be a partner to VillageMD in an ongoing way. We'll continue to be an investor, but what we're really looking to do is invest in capital-light services to be a broader partner across the industry with a range of providers and with a range of payers as well as a range of pharmaceutical manufacturers. We think we're well positioned to do that, particularly based on the conversations we've already been having over the last three months."

Walgreens' primary care assets are "complementary to a lot of players" in the healthcare industry, Langowski said. "They frankly want what we have that they don't have, which is our ability to reach people, our ability to engage them and our ability to create interventions at really critical moments."

Walgreens' U.S. healthcare business continues to be a bright spot for the company. The company's healthcare segment includes 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.

The U.S. healthcare segment reported third-quarter revenue of $2.1 billion, up 7.6% compared to the third quarter of 2023, led by VillageMD and Shields. VillageMD grew 7%, reflecting additional lives in risk and fee-for-service, the company reported.

Shields grew 24%, driven by growth within existing partnerships.

"As it relates to Shields, its performance, growth and leadership team remain best in class and serve as a complement to our core specialty business in the market. We are not taking action at this time," Wentworth said as it related to the company's strategic review.

The U.S. healthcare segment's operating loss was $220 million compared to an operating loss of $522 million a year ago. Adjusted EBITDA of $23 million improved by $136 million versus the prior-year quarter. It's the second consecutive quarter of positive adjusted EBITDA for that segment, driven by cost discipline and growth from VillageMD and Shields, executives said.

In response to a question from an analyst about Walgreens' value-based care strategy and profitability, Wentworth said, "We are big believers in value-based healthcare. Actually, pharmacy is the value-based healthcare provider in the ecosystem. As it relates to VillageMD and that model, we like that model. That's why we said we would continue to have some investment in it and participate in its growth. It will take time. We are looking for a different horizon for what we're going to be investing in strategically under our own leadership."

Walgreens' third-quarter sales increased 2.6% year over year to $36.4 billion, according to its third-quarter earnings report.

The company reported a profit of $344 million compared to net earnings of $118 million a year ago. Last quarter, Walgreens reported a net loss of $5.9 billion compared to net earnings, as earnings were dragged down by the sizable VillageMD write-off.

Third-quarter operating income was $111 million compared to an operating loss of $477 million in the year-ago quarter, an increase of $588 million.

The U.S. retail pharmacy segment had third-quarter sales of $28.5 billion, an increase of 2.3% from a year ago driven entirely by comparable pharmacy sales, partly offset by a retail decline. 

Retail sales decreased 4%, reflecting a challenging retail environment and continued channel shift. Retail margin was negatively affected by increased promotional activity and higher shrink levels, executives said.

Walgreens continues to face an incrementally challenging pharmacy industry, including increased regulatory and reimbursement pressures, Wentworth told investors. "We are at a point where the current pharmacy model is not sustainable and the challenges in our operating environment require we approach the market differently," he said.

"We are in active discussions with our PBM and payer partners to align incentives and ensure we are paid fairly. We are also working with our suppliers and partnering directly with pharma companies to build out specialty pharmacy clinical trials and other services," he said.

Walgreens seems to be following in the footsteps of its competitor CVS Health. CVS announced in December it was overhauling the way it reimburses its pharmacies for prescription medications as the healthcare industry faces increased scrutiny on high drug prices. Under a new model, CVS will shift to fixed rates for reimbursements from PBMs.