Walgreens narrows profit outlook for 2024, takes $6B hit in Q2 from VillageMD investment

This story has been updated following Walgreens' earnings call Thursday

​Walgreens reported a steep quarterly loss, reflecting a nearly $6 billion write-down in the value of its investment in primary care clinic chain VillageMD.

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. But the company is now scaling back VillageMD's footprint. Last fall, Walgreens announced plans to close 60 underperforming 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.

VillageMD now plans to shutter 160 clinics, inclusive of the 60 that had been previously communicated, Walgreens CEO Tim Wentworth told investors during the company's fiscal 2024 second quarter earnings call Thursday. VillageMD has already exited 140 locations and has exited or already notified patients that it is exiting Florida, Indiana, Chicago, Boston, Rhode Island and Las Vegas.

The VillageMD business was impacted by “slower-than-expected trends in patient panel growth and multi-specialty productivity and recent changes in Medicare reimbursement models," Walgreens global chief financial officer Manmohan Mahajan said during the earnings call.

“During the first half of fiscal '24, we have seen positive financial impacts from the recent actions taken by Village MD management team to accelerate profitability. We believe the focused approach on improving performance in core markets as well as rightsizing the cost structure will provide VillageMD a platform for future growth,” he told investors.

Walgreens said second-quarter sales increased 6.3% from a year ago to reach $37.1 billion, according to its Q2 earnings report.

Net loss in the second quarter was $5.9 billion compared to net earnings of $703 million in the year-ago quarter, reflecting a $5.8 billion non-cash impairment charge related to VillageMD.

“This goodwill write-off is noncash, and we do not believe it will have a significant impact on our financial position or our ability to invest across businesses going forward,” Mahajan said.

Loss per share in the second quarter was $6.85 compared to earnings per share of 81 cents in the year-ago quarter. 

Second quarter operating loss was $13.2 billion compared to an operating income of $197 million a year ago. Operating loss in the quarter includes a $12.4 billion non-cash impairment charge related to VillageMD goodwill, which resulted in a $5.8 billion charge attributable to WBA, net of tax and non-controlling interest. Operating loss also reflects a $455 million non-cash impairment charge related to certain long-lived assets in the U.S. retail pharmacy segment, the company said.

The company trimmed its full-year adjusted earnings guidance to now between $3.20 and $3.35 per share. That compares with the company’s previous outlook of $3.20 to $3.50 per share. now EPS guidance to a range of $3.20 to $3.35.

The new earnings guidance reflects a “challenging retail environment in the U.S.,” Wentworth told investors on the earnings call.

The company projects U.S. healthcare EBITDA to be breakeven at the midpoint of the guidance range of a loss of $50 million to $50 million for the full year.

The company's quarterly results beat Wall Street expectations. Earnings, adjusted for one-time gains and costs, came to $1.20 in Q2. The average estimate of nine analysts surveyed by Zacks Investment Research was for earnings of 82 cents per share. Revenue also beat Wall Street projections as analytics expected $36.2 billion in revenue.

"We're encouraged by our first quarter of U.S. Healthcare positive adjusted EBITDA and continued topline growth alongside another quarter of strong execution in pharmacy, as we look to re-energize and evolve its impact both at Walgreens and at large. As we continue to operate in a challenging retail environment, we are taking actions to focus on customer engagement and value," Wentworth said in a statement.

"We remain confident in our goal of achieving $1 billion in cost savings this year. We are continuing to strategically review our portfolio over the next three months in an effort to ensure it drives growth and delivers value. Our team members, led by WBA’s new executive committee with a track record of operational excellence, are powering our progress as we map growth opportunities, aim to create long-term value across our businesses and execute the hard work to simplify and strengthen WBA," Wentworth said.

Wentworth said during the company's Q1 earnings call in January that Walgreens is committed to its primary care business with VillageMD along with Summit Health and CityMD, but does not plan to invest in additional primary care assets.

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 in 2023, which currently manages care for more than 19 million members through over 7,400 provider locations.

The U.S. healthcare segment had second-quarter sales of $2.2 billion, an increase of 33.2% compared to the year-ago quarter, aided by the acquisition of Summit Health by VillageMD. On a pro forma basis, the segment's businesses grew sales at a combined rate of 14% in the quarter, led by VillageMD and Shields. VillageMD grew 20% on a pro forma basis, reflecting same clinic growth and additional full-risk lives under management.

“Shields continues to deliver strong top and bottom line performance as their differentiated model is driving significant value for health system partners, which has resulted in several recent long-term extensions,” Wentworth told investors.

Shields grew 13%, driven by recent contract wins and further expansion of existing partnerships.

“VillageMD's actions to accelerate profitability, including recent rightsizing of their cost structure, optimizing their clinic footprint and growing patient panels, are driving improvement in adjusted EBITDA,” he said. Full-risk lives grew by 19% year-on-year in Q2.

Walgreens has brought in a new leadership team, including Mary Langowski, who led growth strategies at CVS and Solera Health, to run its health services segment.

Langowski told investors on the call that “few companies have the platform, access and reach of Walgreens.”

“Healthcare is changing and consumer expectations are changing. In the face of that, we believe Walgreens is still the best position to be the most convenient entry point into the healthcare system. And our position as an independent partner able to work with any health plan or PBM is a true strength that we will capitalize on,” she said.

The U.S. retail pharmacy segment had second-quarter sales of $28.9 billion, up 4.7%  from the year-ago quarter.  Pharmacy sales increased 8.2% and retail sales fell 4.5%, reflecting a challenging retail environment, channel shift, and a weaker respiratory season.

​Walgreens is gearing up for a strategic 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.

Wentworth shared details about the company’s efforts to “rightsize” the WBA cost structure and increase cash flow. “We have a very high degree of visibility into the $1 billion in cost savings this year as actions already taken to date will account for a significant majority of the total. We're driving savings primarily in our U.S. Retail pharmacy segment in 3 ways: organizational initiatives, including support office workforce reductions, location optimization, and additional pharmacy and retail operating model improvements,” he said.

“We are also working to improve cash flow by prioritizing projects and capital spend. In the first half, CapEx was $250 million lower than the prior year period. We are on track to deliver a $600 million reduction for the full year and $500 million in working capital benefits in fiscal 2024.”

Wentworth noted on the call that Walgreens is exploring “innovative pathways to boost profitability and growth” in its retail pharmacy business, including new pharmacy reimbursement models.

“There is real opportunity for change and transparency in reimbursement models to help slow the inflationary pressures on drug prices and our patient's wallets. We already operate in the number of cost-plus and other alternative reimbursement models very successfully and welcome any model that reimburses us for the unmatched value we provide patients,” Wentworth said.

Walgreens is having “more active and constructive conversations with PBMs [pharmacy benefit managers] and other payers around cost-plus models,” he noted.

“Many of these discussions are still in early stages, but they share a general theme. There is value to all from a transparent, predictable model where what patients pay at the counter is rationally tied to the cost of the drug. We don't expect an industry shift to happen overnight as there are a number of dynamics that need to be worked out, but it's especially encouraging to see PBMs and payers open to these models,” he said.