Walgreens to shut 1,200 stores as it joins other pharmacy chains slashing their footprints

The Deerfield, Illinois-based healthcare company said on Tuesday it was accelerating its plans to downsize its store fleet, with the initial 1,200 shutterings planned for the next three years. Walgreens officials are also evaluating if they should close an additional 800 stores they’ve been monitoring. About 6,000 of the company’s 8,000 U.S. stores are profitable, according to CEO Tim Wentworth.

“This solid base supports our conviction in a retail pharmacy-led model that is relevant to our consumers, and we intend to invest in these stores over the next several years,” he said. “Part of the funding for this investment will come from accelerating the closure of underperforming stores. … Executing on this program will realign our footprint to a healthier store base that we believe will enable us to respond more dynamically to shifts in consumer behavior and buying preferences. Our ability to respond to a changing environment needs to improve and was a critical objective of our strategic review.”

Global Walgreens also reported that it is focused on monetizing noncore assets — including its VillageMD healthcare provider chain — to generate cash. Walgreens’ VillageMD acquired Summit Heath, urgent care chain CityMD’s parent, for $8.9 billion in 2023.

Walgreens’ announcement about its stores isn’t a total surprise. In June, the company said was reviewing whether to close about 2,150 underperforming U.S. pharmacies under a multiyear real estate optimization program. Drugstore chains have had a particularly hard time in the current economic environment, with consumers cutting back spending, financial pressure due to lower reimbursement rates from insurers, and juggernauts such as Walmart, Target and Amazon entering the pharmacy business fray.

Last month Rite Aid emerged from Chapter 11 with what it called a “rightsized store footprint” of about 1,300 stores, down from the 2,100 it had a year ago. In November 2021, CVS said it planned to shutter 900 stores in the next few years, and this year alone it aims to shutter 315 locations, according to Coresight Research. And of course, pharmacy operators aren’t the only retailers slashing their store fleets. For example, in February Macy’s said it planned to close 150 underperforming stores, with 50 of those slated to happen this year.

Walgreens has seen management turnover and prior rounds of store closings. In September last year, then-CEO Rosalind Brewer stepped down. And in June last year, the company said it planned to close 450 stores, 150 in the United States and 300 in the United Kingdom, by the end of August this year.

Walgreens announced its latest store closings when it reported its fiscal fourth-quarter results Tuesday. In a note to clients, Neil Saunders, a retail analyst and managing director at GlobalData, cited the company’s quarterly net loss of $3 billion, bringing full-year net losses to “an eye-watering” $8.6 billion.

On the earnings call, Walgreens Global Chief Financial Officer Manmohan Mahajan said the company expects consumers to remain under economic pressure and to be price sensitive, necessitating shutting stores.

“We are prioritizing closing locations that are cash flow negative, [underperforming] stores where we own the locations, and ones where the lease expirations are coming due in the next few years,” he said. “This focus is expected to partially mitigate the incremental burden of dark rent. The economic benefits of this approach should begin to be tangible in fiscal ’25. By accelerating the scope of our footprint optimization program and focusing on stores with weakest cash generation, we expect to reduce our working capital needs and improve our cash flows over the next 12 months.”

Walgreens expects the immediate benefit to be roughly $100 million dollars of adjusted operating income with positive cash contributions including the cash benefits from working capital and sales of owned stores net of closure costs.

Landlords and retailers have become more creative about vacant drugstore space, with some of it being transformed into car washes, plasma clinics, gas stations, thrift stores and even a combination of restaurants and dog parks.

Besides the 1,200 stores Walgreens has identified for closing, there are another 800 “for which we are focused on improving their operating performance and cash flows,” according to Mahajan.

“However, as has always been the case, we will continuously evaluate this group and all our stores to ensure we ultimately operate with the best possible footprint,” he said.

Saunders raised questions about Walgreens’ strategy of shutting 1,200 locations.

“In our view, the closure of so many stores is emblematic of a company that is in trouble and is trying to course correct,” Saunders said in his note. “Walgreens spent years building its business through acquisitions and completely neglected the fundamentals of its stores and its retail operations. 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. The closures will also raise concerns about the emergence of more pharmacy deserts.”

Saunders also pointed out the weakness in sales for Walgreens’ retail business. While U.S. pharmacy sales rose due to inflation in prescriptions and volume gains, “sales in the front-of-store business went in the opposite direction with a 3.5% decline in total and a dip of 1.7% in comparable terms,” according to Saunders. Consumers are buying their sundries and beauty supplies elsewhere, he said.

“From our data, high prices, poor assortments, a lack of customer service, and terrible store environments all share some of the blame for this ongoing deterioration,” Saunders said.

Walgreens also needs a plan to protect its remaining real estate, according to Saunders.

“Although it will be left with a rump of stronger shops, these are not immune from competitive challenges and troubling market dynamics such as the rise of fast online shopping, the expansion of dollar stores, and the improvement of beauty offers at mass merchants,” he said. “All these things have the potential to undercut store performance and Walgreens needs to ensure that this does not happen.”

Walgreen’s didn’t immediately respond to an email from CoStar News seeking a response to Saunders’ remarks.

But on the earnings call, Wentworth told Wall Street analysts the company was “reorienting to its legacy strength as a retail-pharmacy led company,” allowing it to leverage its “key strategic assets of consumer trust, convenience and relevance.”

To do that, Walgreens is reevaluating its merchandising strategy “to offer a refreshed assortment of products, including our own brands,” according to Wentworth.

“By being more selective with national brands and expanding our own brands, we are sharpening our focus as a destination for categories for which we believe we are uniquely positioned to lead, like health and wellness and specifically women’s health,” he said.

The CEO briefly discussed VillageMD.

“We are focused on monetizing [noncore] assets to generate cash,” Wentworth said. “Chief among these is VillageMD. While our plans with this investment may take several different forms, in all scenarios related to VillageMD, we are committed to redeploying any proceeds to reduce our net debt and improve the health of our balance sheet. Our efforts around VillageMD are just one example of how, on a go-forward basis, we are maximizing optionality around our portfolio of assets.”

Walgreens has roughly 12,500 locations across the United States, Europe and Latin America. It owns the British pharmacy chain Boots.

“Fortunately, outside of the U.S., the international business is performing reasonably,” Saunders said. “Sales this quarter grew by a respectable 3.2% off the back of very strong growth in the prior year. Most of this is thanks to Boots, where comparable sales grew by a very solid 10%. Boots is now a bright spot for a company shrouded in gloom, which means that Walgreens is likely to hold on to it for the foreseeable future. Interestingly, it also provides a template for what good retailing should look like — but this will only be useful if Walgreens is actually open to learning the lessons.”