Walgreens Boots Alliance feels COVID-19's impact in Q3

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Walgreens Boots Alliance feels COVID-19's impact in Q3

By David Salazar - 07/09/2020

With changes in the marketplace driven by the COVID-19 pandemic, Walgreens Boots Alliance swung to a loss in its fiscal third quarter. The company posted a $1.6 billion operating loss, compared with an operating income of $1.2 billion in the prior-year period. Sales were up 0.1% to $34.6 billion, due in large part to a 3% comparable-sales increase in the retail pharmacy USA segment. Overall, loss per share was $1.95, compared with earnings per share of $1.13 a year ago.

“Prior to the pandemic our financial performance for fiscal 2020 was on track with our expectations. However, this unprecedented global crisis led to a loss in the quarter as stay-at-home orders affected all of our markets,” said Stefano Pessina, executive vice chairman and CEO of Walgreens Boots Alliance. “I'm very proud of how all of our teams mobilized and adapted to deliver essential services in our communities across the world.”

Among the impacts from the pandemic was a $700 million to $750 million adverse sales impact that almost entirely struck its non-U.S. business. Additionally, the company’s gross margin was impacted by a shift to lower-margin categories and supply chain costs, while selling, general and administrative expenses increased from higher employee costs, as well as social distancing and cleaning expenses. The biggest impact was felt in the United Kingdom, where the company’s review led to $2 billion in non-cash impairment charges, which it identified as a main contributor to the operating loss. Additionally, WBA saw a worldwide drop in pharmacy volume due to a drop in doctor visits and hospital patient admissions. 

The company’s retail pharmacy USA segment saw sales grow by 3.2% to $27.4 billion, which includes the impact of previously announced store closures. This growth came even as prescription volume dipped by 1.3% in the period, though on a comparable-store basis, scripts were up 0.4% from the prior-year Q3 — a slower rate of growth that WBA saw in Q2, but attributable to a drop in overall doctor visits and hospital admissions. Pharmacy sales were up 4.6% year over year, which the company said was due to higher brand inflation and a 15.9% increase in specialty sales, which offset the COVID-19 script volume impact. Comparable-pharmacy sales were up 3.5%. 

Walgreens retail sales decreased by 0.7% year over year, but comparable-store retail sales were up 1.9% for the quarter – 3.5% excluding tobacco and e-cigarettes. Among specific categories, the COVID-19 pandemic led to a 9% increase in health-and-wellness sales and a 5% increase in personal care sales. At the same time, beauty sales were down 9% year over year while general merchandise was about flat. Household and grocery sales increased by 8%, but these gains were offset by lower discretionary spending and a 34% decrease in photo. Overall operating income for the segment was down 77.3% year over year, totaling $226 million. 

WBA’s retail pharmacy international segment had Q3 sales of $1.9 billion, a year-over-year decrease of 31.5%. Boots UK was hit particularly hard, seeing a 27.7% decrease in sales as foot traffic was disrupted by COVID-19 restrictions. Comparable-store sales at Boots were down 48% year over year and the retailer lost share in its categories as UK shoppers consolidated their shopping to grocers. The decrease was partially offset by a 78% increase in Boots.com sales. Comparable-pharmacy sales were down 1% on a constant-currency basis, due to lower script volume and reduced demand for services during the pandemic. The segment posted an operating loss of #2.2 billion, compared with $119 million in income a year ago, largely due to the $2 billion in impairment charges. 

WBA’s pharmaceutical wholesale division saw sales of $5.9 billion, a year-over-year decrease of 6% that includes an adverse currency impact of 4.8%. Operating income for the segmen was $350 million, including a $243 million gain from WBA’s equity earnings in AmerisourceBergen, which reported a tax benefit from the shutdown of its PharMEDium compounding business. 

WBA noted that throughout the quarter, it had been working to accelerate its investment in four strategic areas — creating neighborhood health destinations, driving a transformational cost-management program, accelerating digitization and transforming and restructuring it retail offering. With regard to its retail offering, the company said that Walgreens built up its personal protective equipment selection and added digital order-ahead drive-thru pickup while also rolling out new delivery options. It also built up its Boots.com digital capabilities, including investments in micro-fulfillment centers and hybrid stores. On the cost management side, its cost containment measures included furloughing more than 16,000 UK employees at the peak of the pandemic, decreasing store hours and temporarily closing stores It also is speeding up it sboots Transformation Plan, which includes reorganizing the Boots store employee structure, closing 48 Boots Opticians stores and a 20% headcount reduction in its UK support office, which will eliminate some 4,000 position. WBA said that its new annual cost savings target from its cost-management efforts to total more than $2 billion by fiscal 2022. 

On the digitization front, WBA said it is investing increasingly in omnichannel and digital infrastructure, noting positive response from consumers to its digital marketing initiatives, including mass personalization, which saw a 95-basis-point impact on retail sales. Additionally, it is working with Microsoft and Adobe to launch a marketing technology and customer data platform to deliver a personalized healthcare and shopping experience. 

The company’s biggest announcement on the topic of creating neighborhood health destinations came the day before it released its earnings. A partnership with VillageMD — which will make WBA a 30% equity owner of VillageMD — will see between 300 and 500 primary care clinics, co-located at Walgreens stores, open in 30 markets over the next five years. The Village Medical at Walgreens clinics will be staffed by more than 3,600 primary care providers. The partnership includes a $1 billion equity-and-convertible-debt investment from WBA, including $250 million in equity upfront. Eighty percent of the investment is expected to be used by VillageMD to fund the clinic openings and integrate with Walgreens’ digital assets.

“Shopping patterns are evolving more rapidly than ever as consumers further embrace digital options, spurring us to accelerate our ongoing investments in digital transformation and neighborhood health destinations,” Pessina said. “This includes our two recent announcements: a significant expansion of our primary care clinics collaboration with VillageMD, and our strategic partnership with Microsoft and Adobe to launch a personalized omnichannel healthcare and shopping experience.”