Walgreens Boots Alliance is reviewing whether to close about 2,150 underperforming U.S. pharmacies under a multiyear real estate optimization program as the chain struggles with uneven sales across its stores.
The Deerfield, Illinois-based company said the review will cover about 25% of its more than 8,600 locations in the United States, but only about 75% contribute to 100% of Walgreens' adjusted operating income, CEO Tim Wentworth said on the company’s earnings conference call Thursday. The company cited U.S. pharmacies as one reason for a 36% drop in its quarterly adjusted operating income.
“For the remaining 25% of the stores in our network, which are not currently contributing to our long-term strategy, changes are imminent,” Wentworth said.
Walgreens said it leases about 95% of its pharmacies under long-term leases and owns the remaining 5%. It joins other pharmacy chains, from Rite Aid to CVS Health, embarking on store closings because of increased competition from other types of retailers and as customers increasingly fill prescriptions online.
Walgreens determines the underperforming stores to close, Wentworth said, it will look closely at the length of term still left on each lease, particularly at stores closer to their end terms.
“It needs to be clear that that is a multi-factor analysis, super detailed, and [lease term] is one of the elements of it,” Wentworth added.
Analyzing Each Store
Other factors the company said it will consider in its review are sales declines; consumer behavior and trends in the stores' market area; whether the population in the market area is growing or declining; and competition from other pharmacies in the market.
The plan also includes suspending sale-leasebacks, a practice in which businesses sell its stores to investors to raise cash and rent back the space.
Sale-leasebacks have in the past been a significant contributor to company revenue, Walgreens Chief Financial Officer Manmohan Mahajan said on the call, but the extra rental costs are now tracking higher than the return the company is getting from the sales. The difference in the past quarter was a “$277 million headwind” to the company, Mahajan said.
Walgreens’ sale-leaseback program has seen falling per-square-foot sale prices over the last five years, according to CoStar data. In 2019, Walgreens’ pharmacies were selling for $486 per square foot. So far this year, those sales have only generated $248 per square foot.
“We continue to face a difficult operating environment, including persistent pressures on the U.S. consumer and the impact of recent marketplace dynamics which have eroded pharmacy margins,” Wentworth said. “Our results and outlook reflect these headwinds.”
There has been speculation about whether the company will try to sell its business in the United Kingdom. Wentworth said on the call, "Our review of Boots UK showed that we have attractive options to unlock value in this business. While we believe there is significant interest in Boots at the right time, its growth strategic strength and cash flow remain key contributors to the company."
He also added "We are committed to continuing to invest in Boots UK and find innovative ways for this business to fulfill its potential."
Walgreens lowered its fiscal 2024 adjusted earnings per share guidance to $2.80 to $2.95, down from $3.20 to $3.35 in the previous quarter, reflecting challenging pharmacy industry trends and a worse-than-expected U.S. consumer environment.
Overall sales in the quarter rose 2.6% year over year to $36.4 billion, while it posted an adjusted operating income of $613 million.