Walgreens retail falters on lower tobacco sales

Dive Brief:

Walgreens Boots Alliance on Thursday reported that third quarter sales rose 0.7% (2.9% in constant currency) to $34.6 billion, thanks mostly to its U.S. pharmacy and wholesale pharmacy operations. Retail sales in the quarter fell 2.9% year over year, reflecting store closures after the acquisition of Rite Aid stores, according to a company press release.
Comparable retail sales fell 1.1% in the quarter, primarily due to a de-emphasis of tobacco, the drugstore retailer said.
Net earnings in the quarter fell 23.6% to $1 billion, and operating income fell 24.7% to $1.2 billion. The retail sales decline, along with "reimbursement pressure in pharmacy," hit adjusted gross profit, which fell 3.9% year over year, the company said.

Dive Insight:

While Walgreens resisted following CVS Health's move to nix tobacco sales in order to underscore its move to a healthcare focus, even when shareholders urged it to, the drugstore retailer is now slowly de-emphasizing those sales.

On a conference call Thursday morning, executives said that plans are in place to shutter about 8% of its U.K. store base, citing a difficult environment there. But overall the quarter was "slightly ahead of our expectations," they also said, and reiterated guidance for the year. Tariffs might hurt more than previously expected, executives also said.

That squares with most analyst expectations as well. But Wells Fargo analysts seem to be in wait-and-see mode. "While the quarter was modestly better than expected, which may help alleviate concerns of persistent weakness, [Walgreens] merely reiterated its FY2019 guidance with a worsened outlook for currency impact," analysts Peter Costa and Polly Sung wrote in comments emailed to Retail Dive.

But overall, despite some moves to compete more in beauty, the company's retail arm is heavily dependent on its pharmacy operations. On the call, CEO Stefano Pessina said the company believes that its growth should be centered on a wide range of healthcare services. But the company is behind its larger rival in that too, considering CVS Health's acquisition of health insurer Aetna and its test of "Health Hub" stores that resemble clinics more than traditional drugstores.