The Zhitong Finance App learned that as American consumers continue to cut expenses under the pressure of high interest rates, Walgreen-United Bosch (WBA.US), one of the largest pharmacy chain operators in the US, plans to close 14% of US stores to cut costs and strive to accelerate the improvement of the company's profit fundamentals. Stimulated by this news of cost cuts and relatively optimistic latest financial data, Walgreen-United Bosz (“Walgreens” for short) stock prices rarely soared. According to investors, the pharmacy chain's active plans to further reduce retail costs and improve cash flow are expected to increase the company's profits and give them the impetus to increase stock prices.
The US pharmacy chain operator said on Tuesday EST that it will close about 1,200 stores within the next three years, 500 of which are expected to close in 2025. By the close of the US stock market on Tuesday, the stock, which had been weak since 2022, had a rare sharp rise, eventually closing up nearly 16%.
Since 2024, the stock has declined as high as 58%, and since 2023, the decline has been as high as 77%. Mainly due to high interest rates and continued inflation, US consumers' demand for non-essential health products has dropped sharply and the pace of procurement of drugs to treat chronic diseases has slowed. At the same time, the operating costs of Walgreens's huge physical stores have continued to rise.
According to statistics, Walgreens's profit margins have been squeezed as the operating costs of a large number of physical pharmacies in the US have continued to rise as inflation continues to rise in recent years. Therefore, as labor costs, rent, and other operating expenses have continued to rise due to continued inflation in recent years, and consumer spending continues to be pressured.
At the same time, the company also released profit guidance for fiscal year 2025, which met the general expectations of Wall Street analysts. Walgreens said on Tuesday that adjusted earnings per share for the fiscal year ending August 31, 2025 will be between $1.40 and $1.80, in line with analysts' average estimate of $1.73.
In terms of the fourth fiscal quarter results recently announced on the same day, earnings per share were $0.39, exceeding analysts' average expectations of $0.36. The latest performance and outlook of this US pharmacy chain operator, which continues to be in trouble with operations, exceeded analysts' expectations. To a certain extent, it shows that its continuous cost reduction measures since this year have begun to achieve positive results. Coupled with the company's plans to continue to increase cost reduction and free cash flow improvement plans, all of which have given investors confidence to hold the stock for a long time.
Jonathan Palmer, an analyst from Bloomberg Intelligence, said: “The decision to close a large number of underperforming stores is very positive in the face of very low expectations.” “The bigger question, however, is how the closing of pharmacies will ultimately increase the profitability of the company's US retail pharmacy business unit, and when it can fully turn a loss into a profit.”
Up to $3 billion in losses
In the fourth fiscal quarter, the company also reported a loss of 3 billion US dollars, which mainly included taxes and fees related to opioid liabilities and a write-down on investment in a Chinese pharmacy chain.
The company said in a document that it will redeploy most of its employees in closed stores.
As more and more budget-conscious consumers in the US turn to large-scale online retail websites such as Amazon (Amazon.com), discount product giants Dollar General, and Costco to buy health products and some medical supplies, Walgreens's physical retail division has been struggling. Competitive pressure caused the company, headquartered in Deerfield, Illinois, USA, to lower its annual performance guidelines for two consecutive fiscal quarters and announced the closure of more stores one after another, causing its stock price to plummet.
Newly released financial reports show that by the fourth fiscal quarter, Walgreens's financial fundamentals improved comprehensively along with cost cuts and free cash flow improvement plans. The fourth fiscal quarter results showed that the overall revenue of Walgreens's US retail pharmacy business unit reached 29.5 billion US dollars for the fiscal quarter, exceeding the general expectations of analysts of about 27.5 billion US dollars.
2025 is still facing headwinds
The company's CEO Tim Wentworth has previously warned that he expects the headwind situation to continue until 2025. In his latest earnings statement on Tuesday, he said that Walgreens is focusing on optimizing its store layout, reducing the number of stores to control operating costs, improving the company's free cash flow, and resolving payment model issues. “This transformation will take time, but we believe these steps will bring significant improvements in financial fundamentals as well as consumer benefits in the long run.” He said in a statement.
More detailed financial reports show that the US healthcare sector, including VillageMD, reported revenue of around $2.1 billion, in line with analysts' estimates. Under the leadership of former CEO Rosalind Brewer, Walgreens invested approximately $5.2 billion in primary care provider VillageMD to enable it to open hundreds of doctors' offices across the pharmacy system, including health products and daily necessities. The move is in line with the company's broader strategy to move from retail to a more profitable healthcare sector.
Walgreens's international business unit revenue, excluding the US market, is about 6 billion US dollars, which is slightly higher than analysts' general expectations of 5.8 billion US dollars. Although the company rediscussed the potential possibility of divesting or selling its Bosch chain of stores last year, it has since shelved initial public offering plans for the Bosch brand. In his latest earnings report, Walgreens CEO Wentworth reiterated his own commitment to investing in the Bosch brand and unlocking its potential.