What Does Walgreens’ Road Back to Health Look Like?

Walgreens recently revealed plans to close as much as 25% of its U.S. store base, with Tim Wentworth, CEO since October 2023, admitting the current pharmacy model is “not sustainable.”

“The challenges in our operating environment require we approach the market differently,” said Wentworth, formerly CEO of Express Scripts, the largest pharmacy benefit manager (PBM) in the U.S., on the chain’s third-quarter call with analysts. “For example, we are in active discussions with our PBM and payer partners to align incentives and ensure we are paid fairly.”

He added, “We are also working with our suppliers and partnering directly with pharma companies to build out specialty pharmacy, clinical trials, and other services which Walgreens is uniquely positioned to facilitate given our physical footprint and the trust we’ve already established with patients.”

Per CNBC, Walgreens’ shares closed more than 20% lower after the retailer reported that its fiscal third-quarter earnings fell short of expectations and reduced its expectations for the current and following year amid continued struggles.

On the call, Wentworth said that U.S. retail pharmacy consumers have become “increasingly selective and price sensitive.” Targeted promotion and price decisions to drive traffic, as well as higher levels of shrink, impacted margins in the latest quarter.

Branded mix impacts and increased regulatory and reimbursement pressures have also negatively impacted pharmacy margins. Prescriptions, a major revenue driver for retail pharmacies, are growing but continue to trail below pre-pandemic growth levels.

To improve profitability, Walgreens plans to close up to a quarter of its roughly 8,700 U.S. stores over the next three years as 75% of those stores contribute about 100% of the U.S. retail pharmacy segment adjusted operating income.

In addition to store closures, Walgreens will be reevaluating assortments, working with “fewer partners who are helping us win.” In the latest quarter, Walgreens removed eight national brands and redeployed those SKUs toward owned brands and preferred partners within health and wellness categories. Wentworth said, “We are sharpening our focus as a destination for areas we are uniquely positioned to lead, such as health and beauty and women’s health.”

Online, Walgreens continues to deliver approximately 80% of same-day delivery orders within one hour. The retailer also has plans to “meaningfully build” its loyalty program.

In the pharmacy area, conversations are taking place with payers and PBMs to improve reimbursements. Mary Langowski, Walgreens’ president of U.S. Healthcare, said on the analyst call, “Put simply, the playbook is a bit dated and does not account for nor does it adequately or fairly pay for the role and value that we think the pharmacist is bringing and delivering services. We also don’t think it accounts adequately for the complexity that we now face in the system, and it certainly doesn’t facilitate putting pharmacotherapy and behavioral interventions at the center of chronic disease management in this country.”

Walgreens has also partnered with 17 pharmacy school deans to form the Walgreens Deans Advisory Council to make Walgreens “the practice-setting destination of choice for pharmacy talent” in the face of a significant shortage in pharmacists in the country, according to Wentworth.

Wentworth cautioned that it will take “quarters, not months” for the retail segment’s profits to stabilize. He told analysts, “The retail pharmacy experience will be more important to the healthcare industry in the years ahead, but it will evolve. With widespread demand for convenient healthcare solutions, including chronic diseases, and nationwide labor shortages, the pharmacy and pharmacists have never been more important.”