Walgreens Boots Alliance’s healthcare services strategy hasn’t hit its stride just yet.
The company’s U.S. healthcare operations reported an adjusted operating loss of $172 million in its fiscal third quarter, bringing its year-to-date operating loss to $483 million.
CityMD, its urgent care provider, saw fewer visits for respiratory illnesses in the quarter and fewer referrals for medical group Summit Health. The healthcare giant’s investments to expand its VillageMD primary care clinics also hurt earnings.
John Driscoll, president of Walgreens’ U.S. healthcare segment, told investors on a Tuesday morning earnings call he is disappointed by the segment’s growth pace, although the company isn’t giving up on what it thinks will soon be a major growth driver.
“While we’re confident in the range and scale of our healthcare business, we are disappointed with the pace of our path to profitability,” Driscoll said. “We’re taking immediate actions to drive improved profitability.”
Walgreens also said it saw pullbacks on consumer spending in the retail segment, plus less demand for COVID-19 vaccinations and over-the-counter tests.
As a result, Walgreens cut its full-year adjusted earnings forecast to $4 to $4.05 per share, compared with its earlier range of $4.45 to $4.65 per share.
Third-quarter net income dropped nearly 60% year-over-year to $118 million, or 14 cents per share. Gross profits rose just 0.2% to $6.59 billion, while its overall operating loss totaled $477 million.
Elizabeth Anderson, managing director at Evercore ISI, said she isn’t surprised by the healthcare segment numbers.
“We’re talking about a major business model transition,” she said. “It makes sense that the [healthcare] business is not as profitable now because of the characteristics of that type of business and how fast it’s growing.”
Pharmacies are also under reimbursement pressures from payers, which can only be offset for so long, Anderson said.
Walgreens raised its five-year, cost-cutting target for a sixth time, to $4.1 billion, from $3.5 billion, with $800 million in expected savings in fiscal 2024. The company said last month it is cutting 10% of its corporate workforce at its Deerfield, Illinois, headquarters and the Chicago office, generating more than $100 million in savings.
Walgreens also sold off its remaining stake in Option Care Health, a home infusion company, earlier this month and continues to trim its store footprint to save money. It plans to close an additional 150 stores in the U.S. and 300 in the U.K., said James Kehoe, global chief financial officer.
Kehoe told investors Tuesday he expects the U.S. healthcare segment to be the largest driver for operating income in 2024.
Driscoll said Walgreens will focus on adding clinics in existing VillageMD markets. The company added 93 clinics in the last year. About 45% of its co-located “Village Medical at Walgreens” clinics have been open for less than a year.
Walgreens said it plans to invest more in CityMD marketing and will continue integration efforts, following the $8.9 billion Summit Health-CityMD acquisition announced in late 2022.
