Walgreens shares surge 29% amid promising Q1 earnings report

The news: Walgreens’ operational turnaround is in full swing following its first quarter earnings report that beat analysts’ estimates. The company’s shares soared over 29% after reporting sales of $39.46 billion, up 7.5% from the same period a year ago.

The outlier was a net loss of $265 million for the quarter, which dwarfs the net loss of $67 million it reported for the prior-year period.

• However, the loss is primarily attributed to higher operating losses stemming from the company’s ongoing closure of 1,200 stores, or about 14% of its physical footprint, over the next three years.
• And investors are content with this cost-cutting strategy as part of Walgreens’ financial plan to get back on track.

Digging into the details: All three of Walgreens’ business segments experienced growth.

• Its US retail pharmacy division posted $30.87 billion in sales, up 6.6% from the same period last year. The figure marks the highest sales for the segment dating back to Q4 2021, per Seeking Alpha.
• Sales from its US healthcare division surged to $2.17 billion, up over 12% from the same period a year ago. The number reflects growth among the company’s primary care provider VillageMD (which it’s still exploring a sale of) and specialty pharmacy business Shields Health Solutions.
• Its international unit, which operates over 3,000 retail stores overseas, posted $6.43 billion in sales for the quarter, an increase of 10.2% from the prior-year period.

Why it matters: The positive earnings come amid reports that Walgreens is considering a sale to private equity firm Sycamore Partners.

No mention of the potential sale was made in either the company’s earnings report or call with analysts, telling us that Walgreens’ commitment to its retail pharmacy-led performance turnaround is the more likely path forward for the company.

Our take: Early returns indicate that Walgreens is starting to steady its ship financially, but these alone don’t signal long-term profitability.

To ensure long-term success, Walgreens needs to prioritize improving the customer experience for both its pharmacy and front-of-store.

• Walgreens noted during the call that it’s planning on enabling virtual check-ins for pharmacy patients who can shop the store while waiting and avoid standing in line.
• We see this as a good start to competing with online giants like Amazon that are capturing more and more of Walgreens’ customers.

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