(Bloomberg) — Walgreens Boots Alliance Inc. faces threats from widespread theft by organized gangs, free government Covid-19 tests and rising labor costs, casting doubt on its rosy outlook for the coming year.
The drug-store chain on Thursday raised its full-year adjusted earnings outlook to low-single-digit growth from flat following a fiscal first quarter that crushed Wall Street analysts’ expectations. The shares fell 1.4% at 11:19 a.m. in New York.
Covid vaccines and tests propelled Walgreens’s quarterly beat, but its forecast implies a lower profit than Wall Street expects, Raymond James analyst John Ransom wrote in a note to clients. The chain also faces a potential hit from the Biden administration’s plan to send 500 million tests to Americans free of charge.
It could be months before the government program begins, Walgreens Chief Financial Officer James Kehoe said Thursday on a call with analysts. But that could still hurt a business that brought in $200 million in the quarter, Jefferies analyst Brian Tanquilut said.
Organized Theft
Meanwhile, Walgreens faces a steep rise in theft at its stores. Shrinkage, the metric retailers use to quantify lost inventory, jumped 52% over the last two years, according to Kehoe.
“This is not petty theft, it’s not somebody who can’t afford to eat tomorrow,” the CFO said. “These are gangs that actually go in and empty our stores.”
Theft poses an “enormous problem,” Kehoe said, calling on Congress to step up with legislation. Chief Executive Officer Rosalind Brewer said she’s personally involved in getting the issue under control. Still, it may take time to resolve, according to Tanquilut.
“While some of us knew, we didn’t appreciate how big of an increase and how big of a headwind that is,” he said in an interview. “How do you deal with that?”
Labor Cost
Walgreens is also trying desperately to hang onto employees and attract new ones in order to keep pace with demand for vaccinations and other services. Already, staffing issues have resulted in cutting store hours at some locations. The company will invest another $120 million in wages, Brewer said.
Sensing frustration among customers, Walgreens issued a targeted apology via email this week. The message applauds the chain’s employees for administering more than 55 million Covid shots and more than 23 million tests in the past two years while filling more than 1 billion prescriptions annually. Yet it recognizes negative feedback from some customers regarding longer lines, out-of-stock items and delayed appointments.
“Now more than ever, we owe it to you to recognize the challenges we as a company have faced during the pandemic,” reads the email co-signed by Walgreens President John Standley and Chief Customer Officer Tracey Brown. The company plans to share the message further through in-store signage and audio recordings, according to a spokesperson.
Retail Resurgence
Still, Walgreens saw a resurgence across the retail segment in the quarter, including in over-the-counter, beauty and personal care products, Standley said on the call. He described it as a “halo effect” from vaccinations and testing. Walgreens’ updated forecast includes administration of 30 million Covid shots, 5 million more than previously anticipated.
Demand for at-home virus tests also helped Walgreens, as the chain captured about 45% of share for at-home tests, CFO Kehoe said, much higher than its typical share of about about 18%. He attributed Walgreens’ success to keeping the products in stock as they fly off shelves at retailers across the country.
Availability of tests from Walgreens should improve significantly by the middle of the month and stay sufficient for the next three months, he said.
“Beyond that, nobody can tell,” Kehoe said. “It’s all on where are the variants at a particular point in time. I think testing is here to stay for a considerable amount of time, but our full-year forecast is not riding on this I can assure you of that.”
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