Walgreens swings to a quarterly loss as coronavirus drives up costs, lowers doctor visits; shares fall

Walgreens Boots Alliance said Thursday that the pandemic hurt its fiscal third-quarter results as fewer people went to the doctor and got prescriptions and the company spent more to staff and clean stores.

The drugstore chain said its profits were dragged down primarily by the United Kingdom. They were also squeezed by increased sales of low-margin items, higher supply-chain costs and additional expenses for labor and store cleaning.

With the steep losses, Walgreens said it would cut more than 4,000 jobs in its Boots UK and Boots Opticians businesses in the United Kingdom, along with shutting 48 optician centers. That amounts to a 7% reduction of the workforce in those two parts of the company. 

Walgreens shares were down about 9% in recent trading Thursday.

The drugstore chain, which was already in the middle of an aggressive cost management effort, said it's now raising its annual cost-savings target to more than $2 billion by 2022. Company leaders said it will also double down on its existing strategies, including digital investments and a focus on adding health care services to its stores.

 "What's important now is that we're taking swift action, both operationally and financially," Global Chief Financial Officer James Kehoe said on an earnings call.

Here's what Walgreens reported compared with what analysts were expecting for the third quarter ended May 31, based on Refinitiv data:

• Earnings per share: 83 cents, adjusted vs. $1.17 expected
• Revenue: $34.63 billion vs. $34.36 billion expected

In the third quarter, Walgreens posted net loss of $1.71 billion, or $1.95 per share, compared with earnings of $1.03 billion, or $1.13 per share, a year earlier.

The loss in the latest quarter included 61 cents to 65 cents per share in Covid-19-related costs and impacts. With one-time adjustments, Walgreens earned 83 cents per share. 

Sales rose slightly to $34.63 billion from $34.59 billion a year earlier. Walgreens said Covid-19 caused sales to be about $700 million to $750 million lower in the quarter, mostly because of a decline at its international stores. 

Its business in the United Kingdom particularly took a hit, which led to the job cuts. The company said footfall in Boots UK stores dropped by about 85% in April during stay-at-home orders, even as the stores were deemed essential retailers and remained open. In a news release, the company said its beauty and fragrance counters "were effectively closed" and more than 100 stores in places like airports were temporarily closed.

Stores in the U.S. fared better. Sales at U.S. stores open at least a year were up 3% from the same period a year ago, beating expectations. Analysts predicted they would decline slightly by 0.2%, according to a StreetAccount consensus estimate. 

In the pharmacy part of the stores, same-store sales rose by 3.5% compared with the same time last year. The company said brand inflation and an increase in specialty sales offset the drop in prescription volumes because of Covid-19. Same-store retail sales grew by 1.9% for the quarter, as there was strong customer demand for vitamins and protective equipment like masks.

The company said the U.S. business, which was a bright spot in the third quarter, is expected to have stronger sales in the next quarter but warned margins will be squeezed by pandemic-related factors, such as increased home deliveries.

Kehoe said Walgreens remains in a strong financial position, pointing to its free cash flow, its cost-savings program and new business opportunities.

For example, he said, Boots' online traffic skyrocketed as its foot traffic came nearly to a stop. He said it "reached Black Friday levels on a daily basis" with online sales up 120% in May and up even higher in June. However, he acknowledged that business comes with fulfillment costs that cut into profits.

On Wednesday, Walgreens announced another new investment: A deal with VillageMD that will open doctor offices in 500 to 700 of its U.S. stores over the next five years. It is testing a small-format pharmacy, too, and adding features the personalize the digital experience for customers.

Kehoe cautioned that the pandemic will continue to challenge the business. The company said it anticipates adjusted earnings per share for the fiscal year to be between $4.65 to $4.75, including adverse Covid-19 impacts of an estimated $1.03 to $1.14 per share. The company said the estimate is based on June sales trends — but said any dramatic changes could throw that off.

The company suspended share buybacks and increased its dividend by 2.2%.