Walgreens to Close Significant Number of Unprofitable Stores in Major Overhaul

Walgreens is planning to shut down a considerable number of its approximately 8,600 locations across the United States as part of a comprehensive effort to restructure the struggling pharmacy chain’s business model.

The company did not specify the exact number of store closures but announced on Thursday that it will undertake “significant” closures of underperforming locations nationwide. This move is part of a multiyear optimization program aimed at revitalizing the company.

CEO Tim Wentworth, during a call with analysts on Thursday, indicated that about 25% of Walgreens’ stores are currently unprofitable. He stated that “changes are imminent” for these locations, and a strategic review will result in the closure of a substantial portion of these underperforming stores.

“We are at a point where the current pharmacy model is not sustainable and the challenges in our operating environment require we approach the market differently,” Wentworth said.

In an interview with the Wall Street Journal, Wentworth elaborated that the closures will target stores that are not profitable, are situated too close to each other, or are experiencing high levels of theft.

While additional details about the closures were sparse, Walgreens disclosed that the process will unfold over the next three years. The company also indicated that further closures could occur if performance does not improve. Wentworth assured that the “vast majority” of employees at affected stores will be offered positions elsewhere within the company.

Stock Declines Amid Weak Financial Outlook
Following the announcement, Walgreens’ shares plummeted by 20%, hitting their lowest level in decades. The company also reduced its full-year profit outlook, citing ongoing challenges in the operating environment.

“We continue to face a difficult operating environment, including persistent pressures on the US consumer and the impact of recent marketplace dynamics which have eroded pharmacy margins,” Wentworth noted in a press release. “Our results and outlook reflect these headwinds.”

The drugstore sector has been significantly impacted by inflation, affecting both the front-end and back-end of pharmacies. Shoppers are becoming more selective and price-sensitive, a trend Wentworth expects to continue, further complicating the operating environment.

Sales for the quarter rose 2.6% to $36.4 billion, but this growth is below inflation and indicates a loss of market share in some segments. Retail sales fell by 4% for the quarter, driven by the cost-of-living crisis which has led customers to buy fewer products and seek better deals.

Challenges Facing Drugstores
Major drugstore chains, including Walgreens, CVS, and Rite Aid, have faced declining profits from prescription fills due to lower reimbursement rates and new competition from companies like Amazon. Additionally, the front-end business of drugstores faces stiff competition from larger retailers like Target and dollar stores.

Walgreens has made changes to its store assortment, removing eight national brands and replacing them with products from its house brands or preferred partners, particularly in the health and wellness categories.

The pandemic had temporarily boosted business due to Covid-19 vaccinations, but fewer consumers are now visiting stores, and prescription volumes are declining as people undergo fewer elective procedures. Additionally, the sale of GLP-1 drugs like Ozempic and Mounjaro, which treat weight loss and diabetes, has not been profitable for Walgreens.

Attempts to pivot the business model have not been successful. Walgreens will no longer maintain a majority stake in VillageMD, a primary care network intended to establish full-service doctors’ offices in hundreds of Walgreens stores. The failed merger led to a significant $6 billion writedown on Walgreens’ balance sheet.

In recent years, CVS has closed around 900 locations, and Rite Aid, which declared bankruptcy in October, has closed more than 100 stores.

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