Walgreens Boots Alliance on Tuesday reported that second-quarter sales rose 4.6% to $34.5 billion as U.S. retail pharmacy sales rose 7.3% to $26.3 billion.
Comparable retail sales fell 3.8% in the quarter. The drop was attributed to a combination of a weak cough, cold and flu season versus the same period a year ago, the de-emphasis of certain products (like tobacco) and a decline in seasonal merchandise sales, according to a company press release.
Gross profit in the quarter fell 3.2% year over year and adjusted gross profit fell 3.5%, primarily because of reimbursement impacts in pharmacy, the company said. Operating income fell 23.3% to $1.5 billion, as adjusted operating income fell 10.4% to $1.9 billion. On a conference call Tuesday, executives said the retailer is conducting an extensive review of underperforming stores.
On a call with analysts Tuesday, Walgreens executives emphasized their efforts to cut expenses and also announced a reorganization of operations in the U.S. and the U.K., but also warned that reimbursement pressures in their pharmacy operations would continue to pressure results. CEO Stefano Pessina called it a "disappointing quarter" but promised that the company is adjusting swiftly. "We are accelerating our actions" especially with regard to cutting costs, he said.
Their annual cost savings target from what they're calling "the transformational cost management program" tops $1 billion "to in excess of $1.5 billion by fiscal 2022." The effort includes "divisional optimization initiatives, global smart spending, global smart organization and digitalization of the enterprise to transform long-term capabilities. During the second quarter and since the quarter ended, the company has taken decisive steps to reduce costs in the UK and to optimize the field management structure in the U.S.," according to the company's release.
While the emphasis was on savings, the company on its call touted partnerships with Kroger, Birchbox and Sprint as examples of ways to boost sales and said it would continue to pursue such investments. "We will not starve the business," Pessina said.
The company's earnings missed Wells Fargo estimates, which analysts there said were already low, and agreed with Pessina's assessment of the quarter. "The disappointing quarter and guidance were even more disappointing than we anticipated, but reflective of the current retail pharmacy environment, which is perhaps already largely recognized by the low valuation," Wells Fargo Senior Analyst Peter Costa and Associate Analyst Polly Sung wrote in comments emailed to Retail Dive.