How did Walgreens exceed Wall Street's expectations and continue its turnaround plan?

People outside of Walgreens in New York. Copyright 2024 The Associated Press. All rights reserved. Creator: Michael Dwyer | Credit: AP

Walgreens reported a fiscal first quarter that exceeded expectations and presented a positive outlook on its strategy to rejuvenate its underperforming business.

The company's stock surged on Friday after executives informed analysts of their progress in addressing a major industry challenge, declining prescription reimbursements, and noted that their store closure strategy was advancing better than anticipated.

CEO Tim Wentworth explained to analysts that the company successfully renegotiated contracts with commercial insurers as well as Medicare and Medicaid plans that cover prescriptions, including adjustments for expensive drugs.

He also mentioned that the company exceeded expectations in transferring prescriptions from U.S. stores slated for closure to other operational Walgreens locations. In October, the company announced plans to shut down approximately 1,200 mostly underperforming U.S. stores.

Walgreens closed 70 stores in its fiscal first quarter and aims to close around 500 this year. The company operates about 8,500 locations in the U.S. and Puerto Rico, along with several thousand stores in Europe and Asia.

These stores still encounter challenges, such as consumers purchasing less due to inflation and ongoing theft, which Wentworth described as “hand-to-hand combat.”

Overall, the company reported a strong fiscal first quarter, according to Edward Jones analyst John Boylan.

“However, we believe it is too early to declare that Walgreens is on a stable growth trajectory,” he stated, emphasizing that changes in prescription reimbursement will require time and their effects remain uncertain.

During the quarter, Walgreens achieved adjusted earnings per share of 51 cents, excluding store closure costs, which led to a total loss of $265 million. The company's revenue increased by 7.5% to $39.5 billion.

Analysts had predicted earnings of 38 cents per share on $37.4 billion in sales, according to FactSet.

Walgreens also reaffirmed on Friday its October forecast for fiscal 2025 adjusted earnings per share to be between $1.40 and $1.80.

Analysts predict earnings of $1.52 per share.

Walgreens started 2024 by reducing its quarterly dividend paid to shareholders by nearly half to strengthen its balance sheet and increase cash flow. The company did not announce any dividend changes on Friday, but Chief Financial Officer Manmohan Mahajan mentioned that Walgreens is still assessing “the appropriateness and size of our dividend as part of our capital allocation policy.”

Walgreens shares dropped at the beginning of 2024 following its dividend announcement and did not recover. The stock lost about two-thirds of its value over the year, while the Dow Jones Industrial Average rose by around 13%.

Shares of the Deerfield, Illinois-based company have started 2025 on a much more positive note. The stock increased by over 26% to $11.64 in Friday morning trading.