• by Sarah Mahoney  @mahoney_sarah, July 5, 2023

Walgreens Boots Alliance may be moving along in its transformation efforts, increasing sales as it continues to consolidate recent healthcare acquisitions. But with weak COVID-19 sales, a mild cough season and increasingly cautious consumers, it has lowered its forecast for the months ahead.

Sales for its fiscal third quarter rose 8.6% to $35.4 billion and exceeded expectations -- gains the company says were driven by solid core business and its rapidly scaling healthcare growth engine.

Retail sales, however, dipped 0.2%, pressured by tobacco sales and fewer people buying over-the-counter testing kits.

And its net income fell to $118 million -- a decline of 59% from the comparable period in the prior year, falling below the number observers expected -- while its operating loss grew to $477 million, compared to $320 million.

In addition to laying off 500 people at its Deerfield, Illinois headquarters, or about 10% of its corporate workforce, it said it is shuttering 150 stores in the U.S. and 300 more in the U.K.

The closings are expected to take place before the close of the retailer's next fiscal year.

In a conference call webcast for investors, CEO Rosalind Brewer acknowledged that consumer sentiment, spending, inflation and ongoing reimbursement pressure still present challenging headwinds.

But as it continues its cost-cutting efforts, she sees progress -- including continued growth stemming from prescription sales, efficiencies as it scales its VillageMD, CareCentrix and Summit Health purchases and better front-of-store results as it revamps its merchandise.

"I am confident that our turnaround strategy positions Walgreens Boots Alliance to drive sustainable core growth and deliver long-term shareholder value."

Yet the company trimmed its forecast for the full year and said it expects challenging economic conditions to continue to pressure consumers. It also predicts a weaker respiratory season, impacting retail and pharmacy sales.

Keonhee Kim, an analyst who follows Walgreens for Morningstar, says those consumer pressures are real. "In an inflationary environment, consumers become more price-sensitive, seeking out cheaper and value-based alternatives," he writes in his note on the results. "Since Walgreens offers the convenience of shopping and picking up prescriptions under the same roof, it charges a premium for its retail items, which are currently not in favor by consumers."

And Walgreens can't shake off the COVID-19 drag. It administered just 800,000 vaccines this quarter, an 83% drop from last year. And while a weaker cough season is good for consumers, it's bad for Walgreens, he writes, "resulting in lower volume of high-margin cough category items."