Closing stores is a fact of life for retailers. But some closings should worry consumers and investors more than others.
Take Walgreens Boots Alliance (WBA). The pharmacy chain just announced plans to close 150 locations in the United States this year.
In its recent third quarter earnings announcement, Walgreens significantly reduced its annual profit guidance, in part because of lower Covid-19 vaccine and testing volumes.
That certainly seems normal since the Biden Administration officially ended the country’s national emergency response to the pandemic in April. Though Covid is still very much around, deaths and hospitalization rates have significantly fallen from 2020.
But Walgreens also warned that the economy is perhaps weaker than we assumed. Inflation, combined with reduced government stimulus and the resumption of student loan payments, is prompting consumers to cut spending.
“We have seen changing market trends that have consumers prioritizing value in response to a more uncertain and challenging economic environment,” CEO Roz Brewer told analysts during a conference call.
Weaker Consumer Demand
Of course, all retailers have been saying something like that. The general consensus is that consumers are buying less “discretionary” merchandise like apparel, electronics, and home goods. That’s why retailers like Target Corporation (TGT), Best Buy Company Inc. (BBY), and Macy’s Inc. (M) are facing some tough challenges for the rest of the year.
But Walgreens is neither a department store or electronics chain. It doesn’t sell widescreen televisions or designer tops. As a pharmacy chain, Walgreens primarily sells the stuff that people depend on for daily life, the merchandise that is supposedly more immune to inflation.
Therefore, Walgreens’ take on consumer demand should alarm retailers -- that no one is safe from an economic slowdown that might cut deeper than people expected.
In response, Walgreens has aggressively shifted its strategic posture, from a company that rapidly grew during the pandemic to a retailer that wants to cut costs and return cash to shareholders.
A Lot More Room to Cut
The 150 store closings is likely just a start. The company wants to trim another $800 million from its balance sheet, bringing its target savings this year to $4.1 billion from its previous goal of $3.5 billion. And in a rather ominous statement in its investor presentation, the chain said there is a “robust pipeline of additional opportunities.”
Walgreens has already laid off corporate workers and reduced store hours. In the conference call, Brewer said Walgreens cut hours at 500 stores in the quarter, bringing the total number of stores with fewer hours to 1,100. Yet that figure represents only 12% of the nearly 9,000 stores the company operates in the United States.
In other words, Walgreens has plenty more room to close stores and cut hours.
Moreover, instead of using shareholder cash to expand, the company now talks of “disciplined, returns-based investment” in its core business, “portfolio simplification,” and repurchasing shares and boosting the dividend.
All this suggests a retailer that’s looking to hunker down because of the worsening economy. The rest of the industry should take note.
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