Q4 performance exceeds expectations, will close 1200 stores, chain pharmacy Walgreens surges over 18% | Financial Report Insights
Despite the sluggish sales, the turnaround plan of the chain pharmacy Walgreens has made preliminary progress by closing more than 1,200 loss-making stores to optimize cash flow and profitability. Although the company is still in the red, its revenue and earnings per share have exceeded Wall Street's low expectations. In addition, with optimistic performance guidance, the stock price soared more than 18% at one point, marking the largest single-day increase in 16 years
Due to budget-conscious consumers shifting to online retailers like Amazon and discount giants Dollar General and Costco, Walgreens' retail department is facing difficulties. Despite the challenging situation, the company is slashing loss-making businesses and seeking transformation in an attempt to turn losses into profits.
On Tuesday, October 15th, Eastern Time, the chain drugstore Walgreens announced its performance for the fourth quarter of the 2024 fiscal year ending on August 31, 2024.
1) Key Financial Data:
Revenue: Sales in Q4 reached $37.55 billion, a 6% year-on-year increase, exceeding the market's expectation of $35.56 billion. By segment, retail pharmacy sales in the U.S. were $29.47 billion, a 6.5% year-on-year increase, estimated at $27.48 billion. Healthcare sales in the U.S. were $2.11 billion, a 7.2% year-on-year increase, estimated at $2.15 billion. International sales were $5.97 billion, a 3.2% year-on-year increase, estimated at $5.84 billion.
Net Loss: A net loss of $3.01 billion in Q4, compared to a loss of $180 million in the same period last year, with a loss per share of $3.48.
Adjusted EPS: Adjusted earnings per share in Q4 were $0.39, higher than the expected $0.36.
Gross Margin: The adjusted gross margin in Q4 was 16.9%, an 18.6% year-on-year increase, lower than the expected 17.6%. The adjusted gross profit was $6.33 billion, a 4% year-on-year decrease, estimated at $6.24 billion.
2) Performance Guidance:
EPS for 2025: Adjusted earnings per share for 2025 are expected to be between $1.40 and $1.80, with an estimate of $1.73.
Net Profit for 2025: Adjusted net profit for 2025 is expected to be between $1.6 billion and $2 billion, with an estimate of $1.89 billion.
Revenue for 2025: Sales are expected to be between $147 billion and $151 billion, with an estimate of $146.9 billion.
After the financial report was released, the company's stock price surged by over 18.2% at one point during the trading day, marking the largest intraday gain in 16 years, and ultimately closing up by 15.78%. Previously, in August 2015, the stock reached a high of $96, but has since dropped by over 90%.
Moving Away from Retail Roots, Slashing Loss-Making Stores to Cut Costs
Analysis indicates that despite the $3 billion net loss in the fourth quarter, Walgreens' earnings per share of $0.39, higher than the expected $0.36, suggests that its aggressive cost-cutting measures are starting to take effect. In addition, under the leadership of former CEO Rosalind Brewer, the company invested $5.2 billion in primary care provider VillageMD, enabling it to open hundreds of doctor's offices in its pharmacies. This move aligns with the company's broader strategy of moving away from its retail roots and expanding into the more profitable healthcare sector. The company also hired Jason Stevison as the new Chief Technology Officer to drive growth plans in the U.S. healthcare sector.
CEO Tim Wentworth stated, "We expect headwinds to persist until 2025. Turning the situation around will take time, but we believe that in the long run, it will bring significant economic and consumer benefits. Walgreens is focused on optimizing its store layout, controlling operating costs, improving cash flow, and addressing reimbursement models."
The company also announced that it will cumulatively close 14% of its U.S. stores (about 1,200 stores) over the next three years, with around 500 stores set to close by 2025, aiming to reduce costs, improve profitability, and cash flow. In June, Walgreens announced the closure of 300 underperforming stores. The company also noted that about a quarter of its stores are operating at a loss and are facing "imminent" transformation.
Analysts: Better Than Expected, Watching Future Transformation Progress
Leerink Partners analyst Michael Cherny believes that Walgreens needs to provide more detailed information in the upcoming report, especially on how they expect their revenue and earnings per share (EPS) to break down. The announcement of store closure plans is a start, but he hopes to have a clearer picture of which specific stores will be closing. Overall, the performance in the fourth quarter of the 2024 fiscal year and the guidance for the 2025 fiscal year are not as bad as imagined, which is a relatively positive signal compared to recent trends.
Evercore ISI analyst Elizabeth Anderson pointed out that the company's performance in the 2024 fiscal year was relatively strong, with robust sales growth in pharmacies. The adjusted operating profit margin for the U.S. healthcare business turned positive for the first time, indicating that the company has made progress in improving gross margins and operating expenses.
Barclays analyst Stephanie Davis stated that she remains cautious about the company's prospects, but she believes that the 2025 performance guidance is "better than expected".
Bloomberg industry research analyst Jonathan Palmer stated that in the current market with very low expectations, the decisive decision to close a large number of underperforming stores is a good thing. However, the bigger question is how the closure of these stores will ultimately improve the profitability of U.S. retail pharmacies and the timing of turning the situation around