Dive Brief:
- Walgreens missed Wall Street earnings expectations in its third fiscal quarter and cut its 2023 outlook, citing macro factors including a weak respiratory season and falling demand for COVID-19 tests and vaccines.
- The pharmacy chain did beat the Street’s revenue expectations with a topline of $35.4 billion, up 9% year over year, thanks in part to its expanding U.S. Healthcare segment, which includes value-based medical group VillageMD.
- Walgreens’ stock fell more than 10% in morning trading Tuesday following the results, reaching its lowest point in over a decade.
Dive Insight:
The Deerfield, Illinois-based retailer’s net earnings fell almost 60% year over year in the third quarter to $118 million, mostly due to lower operating income.
Management cited uncertainty in consumer spending, along with lower demand for COVID-related services, in lowering its full-year adjusted earnings forecast to $4 to $4.05 from its previous outlook of between $4.45 and $4.65. The new outlook represents roughly flat earnings growth compared to the prior year.
“Our performance in the third quarter did not meet our overall expectations,” Walgreens CEO Roz Brewer said on a Tuesday morning call with investors.
It also cited a slower-than-expected profit ramp for its U.S. Healthcare segment, which Walgreens has built up through a series of recent acquisitions to include VillageMD, at-home care provider CareCentrix and specialty pharmacy Shields Health Solutions.
U.S. Healthcare grew 22% year over year on a pro forma basis, reaching $2 billion in revenue. Sales at VillageMD, Shields and CareCentrix were up 22%, 35% and 15%, respectively, according to Walgreens CFO James Kehoe.
However, the unit reported an adjusted operating loss of $172 million. The loss was due to investments in new clinic expansions at VillageMD and fewer visits to CityMD — the urgent care provider VillageMD acquired in its Summit Health deal late last year — amid the low respiratory season.
U.S. Healthcare missed targets in the quarter due to VillageMD and CityMD’s underperformance, but 2023 was meant to be a transition year for the division as it works to find synergies among the different businesses, said John Driscoll, president of U.S. Healthcare, on the call with investors.
”We are obviously disappointed with the pace,” Driscoll said.
Walgreens executives said they plan to take immediate actions to optimize profitability for U.S. Healthcare, including building out VillageMD patient panels faster by marketing more aggressively. Walgreens also named a new CFO for VillageMD.
Driscoll shared that Walgreens plans to push more VillageMD fee-for-service lives into value-based arrangements as the entire U.S. Healthcare operation looks to take on more risk to improve care quality and unlock profitability.
In addition, Walgreens raised its long-term synergy target for VillageMD and Summit to $200 million by 2026, instead of $150 million by 2027.
On the call, management reiterated Walgreens’ commitment to its nascent clinical trials business, which has signed its first eight contracts. Walgreens launched the venture in late 2022 but it faces fresh opportunities after rival CVS said it would shutter its own clinical trials division earlier this year.
