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Walgreens plans to close a significant number of its roughly 8,600 stores across the U.S. as it tries to turn around the struggling drug chain's business.
The company did not provide specifics on how many stores it would close, but said Thursday it plans to close a “significant number” of underperforming stores across the U.S. as part of a multiyear optimization program.
Chief Executive Officer Tim Wentworth said on a conference call with analysts on Thursday that “changes are imminent” for about 25 percent of stores that are unprofitable and that Walgreens' strategic review “will include closing a significant number of underperforming stores.”
“We have reached a point where the current pharmacy model is not sustainable and challenges in the operating environment require us to change our approach to the market,” he said.
In an interview with The Wall Street Journal on Thursday, Wentworth said the closures would focus on locations that are unprofitable, located too close to each other or plagued by theft.
Walgreens gave few details about the closures during the conference call but said they would happen over the next three years and that it would consider further closures if business doesn't improve. Wentworth said the “vast majority” of employees working at the affected stores will be offered jobs elsewhere.
Walgreens (WBA) shares fell 20% to their lowest level in decades, and the company also said in its earnings call that it had sharply cut its full-year profit guidance.
“We continue to face a challenging operating environment, including ongoing pressures on the U.S. consumer and the impact of recent market trends that are reducing pharmacy margins,” Wentworth said in a press release. “Our results and outlook reflect these headwinds.”
Inflation has hit the drug store business hard on both the front and back ends of pharmacy.
“Shoppers are becoming increasingly selective and price sensitive,” Wentworth said on a conference call, adding that he expects the U.S. “business environment will remain challenging” and that he “does not expect improvement.”
Quarterly sales rose 2.6% to $36.4 billion. “While this may not seem unreasonable, this is below the rate of inflation and will mean market share loss in some areas of the business,” Neil Saunders, managing director at GlobalData, said in a note.
Of particular concern for Walgreens is that retail sales fell 4% during the quarter, but that's not surprising because its in-store struggles have been “exacerbated by the rising cost of living, which has led customers to buy less and shop around for better deals and bargains,” Sanders added.
Walgreens followed rivals in slashing prices on more than 1,000 items in May to lure back inflation-weary shoppers turned off by higher prices, but the company said Thursday that it would hurt profitability.
Large drugstore chains such as CVS and Rite Aid have struggled in recent years due to declining profits from filling prescriptions, with lower reimbursement rates and new competition from Amazon slowing their performance.
Drugstores, which sell snacks and household items on their shelves, also face pressure from larger competitors such as Target and dollar stores.
Wentworth said on the conference call that Walgreens is changing the assortment in its stores, eliminating eight national brands and instead selling lookalikes made by its own brands or “preferred partners.” He did not say which brands are being phased out, but said they are in the health and wellness category.
Drugstores have benefited during the pandemic as people have received COVID-19 vaccinations, but fewer consumers are visiting stores to shop and prescription volumes are down as fewer people are getting elective procedures.
GLP-1 drugs, which include the weight-loss and diabetes medications Ozempic and Maunjaro, aren't profitable for the chain, and Wentworth told The Wall Street Journal that it loses money filling prescriptions for them.
A shift in its business model hasn't helped either: Walgreens will no longer own a majority stake in VillageMD, a primary-care network that once had plans to open full-service clinics in hundreds of stores. Walgreens said its ill-fated merger with VillageMD had caused such a steep decline in value that it was forced to take a huge $6 billion write-down on its balance sheet.
CVS has closed about 900 stores over the past few years, and Rite Aid, which filed for bankruptcy in October, has closed more than 100 stores.
–CNN's Nathaniel Myerson contributed to this report.
