Walgreens should scale down clinics to improve FY24 outlook: Jefferies

Walgreens Boots Alliance (WBA) posted its second report, revealing a quarterly revenue that beat expectations but a narrow outlook for 2024, citing difficult conditions within the retail environment. Jefferies Healthcare Services Equity Researcher Brian Tanquilut joins Yahoo Finance to discuss Walgreens' performance for the quarter and how it can mount a turnaround.

Tanquilut lays out one of the big problems with Walgreens and their strategy to implement VillageMD clinics in stores: "The problem with the clinics is that they lose between $1 to $3 million a year on the front end in the first few years. And so, if you just run that math, it is a lot of losses that Walgreens has had to eat over the last couple years, and so as management tries to shore up the balance sheet, improve cash flows, improve profitability, this is one of the big sticking points where you could -- they're looking at, saying, do we really need to invest this much into a physician clinic strategy that is actually not even located in our stores anymore? "

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Editor's note: This article was written by Nicholas Jacobino

Video Transcript

- We're going to continue talking about Walgreens because share's feeling a bit of pressure this morning despite beating the Street's expectations on the top and bottom line. The drugstore chain posted a steep net loss for its fiscal second quarter and narrowed its fiscal 2024 guidance, that's amid a more challenging retail backdrop.

For a deeper dive into the company's latest results, we are joined by Brian Tanquilut, Jefferies Health Services equity researcher. And Brian, thank you so much for being here. I want to start by getting your reaction to this earnings print. Good news in there. But ultimately, we're trading on the bad news today. What do you think is the single biggest thing that Walgreens needs to turn around from this earnings print to have a better quarter of earnings next quarter?

BRIAN TANQUILUT: Yeah. And good morning and thanks for having me. So first, to your question, obviously, they put up an above consensus or above Street Q2 EPS. But if you back out the impact of tax, I mean, they still beat, right? And as you said that they narrow the guidance for the year, which implies a back half kind of like EPS run rate in the kind of like annualized in a 2.68 to 2.98-- $2.98 range.

Now, if you think about where Street estimates are for 2025, for fiscal '25, it's at $3.50. So I think the reaction here is realizing that the outyear estimate for Walgreens is too high and that Street numbers need to come down based on what the run rate of the business is as we get into their fiscal second half.

Now, the other thing I think that was interesting is just the fact that they called out the weakening, a weakening consumer environment. And that's one of the reasons why they narrowed the guidance range down. So obviously, a lot of concern there because we're not sure what that means and how long it will impact earnings and foot traffic and just sales on the front end of the store. So those are probably the key highlights here.

And then maybe through the part of your question, what do they need to do? One of the things that management announced today is that they're conducting a strategic review of the different assets that they own and that they've bought over the years.

And so I think we want to see them maybe monetize some of those assets or maybe even reduce some of the clinic footprints that they have, which are currently losing money. So there are certain moves that management can make here over the next few quarters, for sure.

- So Brian, when you talk about the potential for further reduction in clinics, talk to me about why that strategy makes sense given that the fact that they're still seeing pressure in other parts of their business as well.

BRIAN TANQUILUT: Yeah. So what it is that they've built these clinics. I mean, they bought a company called VillageMD, and Village builds clinics, right? And so they have more than 300 clinics or had around the country. And the problem with the clinics is that they lose between $1 to $3 million a year on the front end in the first few years.

And so if you just run that math, it is a lot of losses that Walgreens has had to eat over the last couple of years. And so as management tries to shore up the balance sheet, improve cash flows, improve profitability, this is one of the big sticking points where they're looking at saying, do we really need to invest this much into a physician clinic strategy that is actually not even located in our stores anymore? So they're shut down pretty much all the in-store clinic locations.

So the synergy of that strategy is now being reviewed by management. And part of the key here is that there's a new CEO new management in place. So they're not married necessarily to these assets and strategies.

- Do you like the new CEO for the future of the company?

BRIAN TANQUILUT: I think Tim is a-- he's a seasoned health executive. He's been in the pharmacy supply chain for a long time. He came from the PBM space with MedCo and Express Scripts before they got sold. And then now, he's at Walgreens. And I think he has a track record of being a very good operator.

Now, the challenges that Walgreens faces today are probably different from what Tim has seen in the past. But I think he's got the right team around him to really evaluate what the right move going forward is. I think the only challenge here is time. Some of these moves are going to have to make will take a lot of time before we really see the impact in terms of like an inflection in earnings performance.