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Dive Brief:
Continuing its belt-tightening, Walgreens will close about 1,200 stores over the next three years, starting with about 500 in the current fiscal year, which just commenced.
That’s more than half the number of stores the drugstore retailer acquired from Rite Aid seven years ago, after they called off their planned merger.
Retail operations were a drag on results: Q4 retail sales fell 3.5% year over year, with comps down 1.7%, while full-year retail sales fell 4.6%, with comps down 3.4%, per an earnings presentation. Beauty, seasonal and general merchandise siphoned about 150 basis points from Q4 comps, and elevated shrink levels offset positive impacts on retail adjusted gross margin from category mix and private labels.
Dive Insight:
Walgreens is emerging from a rough period that has included shakeups across its executive leadership ranks and a couple of rounds of layoffs. CEO Tim Wentworth months ago warned of a significant number of store closures, noting that about a quarter of its 8,700 U.S. stores were underperforming.
The company has capped off its fiscal year with ballooning year-over-year losses, of $15.4 billion for the year and $3.1 billion in Q4. For the quarter, company-wide sales rose 6% year over year to $37.6 billion, and 6.2% to $147.7 billion for the year.
Wentworth said earlier this year that profitability and shrink were two variables that would drive the company’s store closure plans; in its presentation Tuesday, the company said more specifically that its considerations include cash flow benefits, underperforming owned locations and expiring leases. About a quarter of Walgreens’ stores are either owned locations or are at the end of their leases, with another quarter under leases that are within four years of their expected closure date.
These plans will be “immediately cash flow accretive, net of closure costs,” with such benefits scaling as leases expire; sales of owned stores will yield working capital and sales proceeds that are “significantly higher than cash closing costs;” and closures could also allow the company to sublease or take advantage of lease buyouts that mitigate the cost of having to pay rent on a closed location, per the presentation.
But “the closure of so many stores is emblematic of a company that is in trouble and is trying to course correct,” according to GlobalData Managing Director Neil Saunders. It also raises the prospect of more pharmacy deserts in the U.S., where people don’t have access to medication and other healthcare services, he said in emailed comments.
“Walgreens spent years building its business through acquisitions and completely neglected the fundamentals of its stores and its retail operations,” he said. “That has pushed a lot of outlets into a position where they are now losing sales and are not generating a return. Cutting out the dead wood will help the company strengthen its financials over time, but it is effectively a huge admission of failure.”
