Walgreens Boots Alliance (WBA) recently made headlines with its announcement to close 150 locations in the United States this year, a move that should worry both consumers and investors.
The global model is failing. Our dependence on international corporations to provide our needs is a vulnerability. Walgreens is just the latest evidence of this.
In its third-quarter earnings report, Walgreens cited a significant reduction in its annual profit guidance, partly due to lower volumes of Covid-19 vaccines and testing. While this may seem expected following the end of the national emergency response to the pandemic, Walgreens' cautionary statement indicates a potentially weaker economy than previously assumed. Factors such as inflation, reduced government stimulus, and the resumption of student loan payments have prompted consumers to cut back on spending.
CEO Roz Brewer highlighted changing market trends during a conference call, with consumers now prioritizing value in response to an uncertain and challenging economic environment. While many retailers are experiencing a decline in discretionary purchases, Walgreens' unique position as a pharmacy chain raises concerns. As a retailer primarily selling essential goods for daily life, Walgreens' observation of weaker consumer demand should alarm the industry, suggesting an economic slowdown that may have deeper implications than anticipated.
In response to these challenges, Walgreens has shifted its strategic approach to focus on cost reduction and returning cash to shareholders. The announced store closures are likely just the beginning, as the company aims to further trim $800 million from its balance sheet. With a goal of achieving $4.1 billion in savings this year, Walgreens is actively exploring additional opportunities for streamlining operations.
Already implementing measures such as corporate layoffs and reduced store hours, Walgreens has identified ample room for further store closures and hour reductions. Despite operating nearly 9,000 stores across the United States, only 12% have experienced reduced hours thus far. This indicates that Walgreens has significant flexibility to implement further cost-cutting measures.
Instead of using shareholder funds for expansion, Walgreens now emphasizes disciplined, returns-based investment in its core business, portfolio simplification, and initiatives such as share repurchases and dividend increases. These actions reflect a retailer that is adopting a defensive stance in response to a deteriorating economy. The broader industry should take note of these developments and consider their implications.