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Walgreens Drops as U.S. Drugstores Feel Health-Care Pressure

Robert Langreth
Walgreens Drops as U.S. Drugstores Feel Health-Care Pressure

(Bloomberg) -- Walgreens Boots Alliance Inc. closed at its lowest price since 2013 after the company, the U.S.’s biggest standalone drugstore chain, fell victim to many of the pressures rippling through the health-care and retail industries.

In the back of the store at the pharmacy counter, where more than two-thirds of U.S. store sales come from, Walgreens is filling more prescriptions but making less money on them. Up front, same-store retail sales were down 3.8 percent, as the company sold fewer cough and cold products and brought in less from tobacco.

Chief Executive Officer Stefano Pessina called it “the most difficult quarter we have had since the formation of Walgreens Boots Alliance.” The shares fell 13 percent to $55.36 in New York, the biggest one-day drop since Aug. 6, 2014, the day Walgreens announced it was joining with European drugstore chain Alliance Boots GmbH to form the current company.

The company is making several moves as its business deteriorates. It lowered its fiscal 2019 forecast, after reporting second-quarter results that fell short of Wall Street analysts’ estimates. Earnings this year will the flat, the company said, after previously predicting growth of 7 percent to 12 percent.

The Deerfield, Illinois-based company will also expand a cost-cutting plan by about half, from at least $1 billion in annual savings to a targeted $1.5 billion or more by 2022. Walgreens said those savings will come from streamlining operations and digitizing some business functions. Brian Faith, a spokesman for the company, declined to say whether there would be job cuts, or of what size.

Walgreens’ U.S. business is “under siege,” said Evercore ISI analyst Ross Muken in note to clients, with worse results than even pessimistic investors had imagined. “This is truly a terrible print, as most metrics missed materially.”

Adjusted earnings in the second fiscal quarter, which ended on Feb. 28, were $1.64 a share. Analysts had expected $1.72 a share, on average.

Walgreens’ dire outlook follows an more drastic move by Rite Aid Corp., the drugstore chain it tried to buy starting in 2015. Last month, Rite Aid parted ways with its top executives and said it would eliminate 400 corporate jobs in an effort to turn itself around by cutting costs. Facing antitrust scrutiny, Walgreens had to settle for only half of Rite Aid’s stores.

As Walgreens and Rite Aid have been making plans to shrink their costs, many of their rivals and business partners are getting bigger. CVS Health Corp. bought health insurer Aetna. With the about $68 billion deal, CVS has become a health-care conglomerate that plans to offer medical services at some of its more than 9,800 U.S. locations, will oversee drug benefits for consumers, and will also run a major insurer. UnitedHealth Group Inc., an insurer, has been buying up medical clinics and physician practices, and insurer Cigna Corp. recently acquired the pharmacy-benefit manager Express Scripts.

Pessina promised the company would do more to make changes.

“We are going to be more aggressive in our response to these rapidly shifting trends,” he said in the statement. The company has announced a retail partnership with grocer Kroger Co., a drug delivery agreement with FedEx Corp., and a digital health effort with Microsoft Corp.

Pessina said Walgreens would return to “mid-to-high single-digit growth” for adjusted earnings in future years.

(Updates shares in the third paragraph. An earlier version of this story corrected the number of CVS stores in the U.S.)

--With assistance from Cecile Daurat.

To contact the reporter on this story: Robert Langreth in New York at rlangreth@bloomberg.net

To contact the editors responsible for this story: Drew Armstrong at darmstrong17@bloomberg.net, Timothy Annett

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