Raphael Stevens

Walgreens reported fiscal third-quarter earnings that fell short of expectations and slashed its full-year adjusted profit outlook due to a “challenging” environment for pharmacies and U.S. consumers. 
The company topped revenue estimates for the quarter on strong performance in its health-care segment.
The results come as Walgreens works to slash costs by closing underperforming U.S. stores, among other efforts.

In an aerial view, a customer enters a Walgreens store on January 04, 2024 in San Pablo, California. 
Justin Sullivan | Getty Images

Shares of Walgreens plunged more than 14% on Thursday after the company reported fiscal third-quarter earnings that fell short of expectations and slashed its full-year adjusted profit outlook, citing a “challenging” environment for pharmacies and U.S. consumers.
The retail pharmacy giant now expects fiscal 2024 adjusted earnings of $2.80 to $2.95 per share. That compares with the company’s previous outlook of between $3.20 and $3.35 per share.

“‘We assumed … in the second half that the consumer would get somewhat stronger” but “that is not the case,” Walgreens CEO Tim Wentworth told CNBC. 
He added that “the consumer is absolutely stunned by the absolute prices of things, and the fact that some of them may not be inflating doesn’t actually change their resistance to the current pricing. So we’ve had to get really keen, particularly in discretionary things.” 
Still, Walgreens topped revenue estimates for the quarter on strong performance in its health-care segment. The company views that business division as critical to its ongoing push to transform from a major drugstore chain into a large health-care company. 
The results come as Walgreens works to slash costs after a rocky last year marked by low pharmacy reimbursement rates, weakening demand for Covid products and a challenging macroeconomic environment. 
The company on Friday said it is simplifying its U.S. health-care portfolio and finalizing plans to close underperforming U.S. stores over multiple years, among other ongoing cost-cutting efforts. 

“Seventy-five percent of our stores drive 100% of our profitability today,” Wentworth said. “What that means is the others we take a hard look at, we are going to finalize a number that we will close.”
Here’s what Walgreens reported for the three-month period ended May 31 compared with what Wall Street was expecting, based on a survey of analysts by LSEG:

Earnings per share: 63 cents adjusted vs. 68 cents expected
Revenue: $36.4 billion vs. $35.94 billion expected

Walgreens booked sales of $36.4 billion for the quarter, up 2.6% from the same period a year ago. 
The company reported net income of $344 million, or 40 cents per share, for the quarter. That compares with net income of $118 million, or 14 cents per share, for the same period a year ago.
Excluding certain items, adjusted earnings were 63 cents per share for the quarter. 
Walgreens did not provide a new revenue forecast for the fiscal year. The company has not offered that guidance since October, when it said it expected $141 billion to $145 billion in sales. 

Strong performance in health-care division 

Walgreens reported growth across its three business divisions in the fiscal third quarter. But the company’s U.S. health-care unit stood out, as sales jumped 7.6% compared with the same period a year ago. 
Revenue for the segment came in at $2.13 billion. Analysts had expected sales of $2.08 billion, according to estimates compiled by FactSet. 
The company said the higher sales reflect primary care provider VillageMD and specialty pharmacy company, Shields Health Solutions. Shields saw sales jump 24% during the period, driven by growth within existing partnerships.
Specialty pharmacies are designed to deliver medications with unique handling, storage and distribution requirements, often for patients with complex conditions such as cancer and rheumatoid arthritis.

Walgreens and VillageMD
Source: Walgreens

Those results come one quarter after Walgreens posted a steep net loss as it recorded a hefty nearly $6 billion charge related to the decline in value of its investment in VillageMD. The company now plans to shutter 160 VillageMD clinics, executives announced during the company’s fiscal second-quarter earnings call in March. 
“We are working with their management team to ultimately still be an investor, but meaningfully reduce our investment as well as gain some liquidity so that we can invest back in the retail pharmacy business that represents our future,” Wentworth told CNBC of the company’s investment in VillageMD.
Walgreens’ U.S. retail pharmacy segment generated $28.5 billion in sales in the fiscal third quarter, an increase of 2.3% from the same period last year. Analysts had expected sales of $28.34 billion, according to estimates compiled by FactSet. 
That segment operates more than 8,000 drugstores across the U.S., which sell prescription and nonprescription drugs as well as health and wellness, beauty, personal care, and food products.  
The company said that sales growth came entirely from comparable pharmacy sales and was partially offset by a decline in retail revenue.
Walgreens said pharmacy sales for the quarter rose 4.4% and comparable pharmacy sales increased 5.7% compared with the year-earlier period due to price inflation in brand medications and prescription growth. 
Total prescriptions filled in the quarter including vaccines totaled 306.4 million, a 0.5% increase from the same period a year ago. 

More CNBC health coverage

Retail sales for the quarter fell 4% from the prior-year quarter, and comparable retail sales declined 2.3%. The company pointed to a “challenging” retail environment, among other factors. 
Walgreens’ international segment, which operates more than 3,000 retail stores abroad, posted $5.73 billion in sales in the fiscal third quarter. That’s an increase of 2.8% from the year-ago period.
The company said sales from its U.K.-based drugstore chain, Boots, grew 1.6%.
Walgreens reportedly scrapped plans for a potential initial public offering of the subsidiary and is in informal talks with potential buyers, including private equity firms, Bloomberg News reported earlier this month.
But Wentworth said Walgreens has no plans to sell the chain.
“Right now, there’s no question Boots is a major contributor to us,” he told CNBC.
— CNBC’s Bertha Coombs contributed to this report.

Don’t miss these insights from CNBC PRO More

Private label wars have heated up as consumers look for value and unique items.
Walmart-owned Sam’s Club is trying to raise the quality of its private brand, Member’s Mark.
Chief rival Costco has a strong fan following of its own brand, Kirkland Signature.

Stuck at home during the Covid pandemic, Megan Crozier needed a way to keep her two young children entertained. She bought an inflatable pool from Sam’s Club.
The pool began leaking air after just a few uses.

For Crozier, chief merchant of the Walmart-owned membership club, that trashed pool — and the disappointment that came with it — helped kickstart a years-long effort to catch up with chief rival Costco and the popularity of its private brand, Kirkland Signature.
As Sam’s Club opens more locations, it is trying to raise the bar for its own brand, Member’s Mark. The label’s makeover has become critical for Sam’s Club as it aims to close the gap with Costco, which has roughly the same number of U.S. clubs but about twice as much annual revenue. Net sales for Sam’s Club totaled $86.2 billion in its most recent fiscal year, compared with $176.63 billion for Costco’s U.S. clubs.
Sam’s Club CEO Chris Nicholas told CNBC the brand’s revamp was inspired, in part, by the retailer’s chief rival.
“The club model survives because you have brilliant merchants focusing on creating or buying exceptional items,” he said in an interview. “Costco did such a great job of that over the years with Kirkland and we saw that be successful.”
The success of Member’s Mark will help determine how Sam’s Club fares as its expands, with plans to open more than 30 stores over the next four years. At least some stores will be in regions where potential customers belong to a competing club like Costco or B.J.’s Wholesale, or in areas where customers may need convincing to pay an annual membership to be able to shop.

Overtaking Costco and its beloved private label won’t be easy for Sam’s Club, said Michael Baker, a retail analyst for D.A. Davidson.
“Never say never,” he said. “Who knows? But I think it’s going to take a long time.”
But he added Costco’s success with Kirkland Signature created a formula that Sam’s Club can follow.
The popularity of Kirkland’s brand, which includes a diverse range of items like vodka, batteries and dress shirts, has helped to drive membership sign-ups and renewals. It is one of the features that Costco highlights when the retailer’s pitch to members.

In this photo illustration, Sam’s Club’s private label Member’s Mark is seen versus Costco’s Kirkland Signature label.
Natalie Rice | CNBC

Private label wars heat up

Sam’s Club has more reasons than its rivalry with Costco to step up its private label game.
The brands’ stigma of inferior quality or cheaper knockoffs of national name brands has faded as retailers including Kroger, Target and Walmart have introduced their own labels with unique flavors and exclusive items.
Baker credits Kirkland for helping with that since Costco launched the brand in 1995.
“They didn’t invent the idea of private label,” he said. “But I think what they changed or made revolutionary is that it can be a high quality product.”

Jordan Vonderhaar | Bloomberg | Getty Images

Other factors have turned the tide. Consumers experimented with new brands during the Covid pandemic when they couldn’t find their typical purchases on shelves. Some fast-growing grocers, including Trader Joe’s, Aldi and Lidl, have fueled growth almost entirely through their own brands. And stubborn inflation also pushed more consumers to buy a store’s own brand to save some bucks.
Sales of private label increased 34% between 2019 and 2023 to $236.3 billion, according to the annual report by the Private Label Manufacturers Association, which is conducted by market research firm Circana.
Exclusive offerings, such as products you can’t find anywhere else, are even more essential for clubs, which require shoppers to pay a membership fee. Annual fees cost $60 at Costco and $50 at Sam’s Club. Each also has a higher-tier membership: $120 at Costco and $110 at Sam’s Club. (Costco is widely expected to raise its annual fee soon, based on its history of doing so.)
At Sam’s Club, Member’s Mark accounts for roughly 30% of sales in terms of dollars and more than one-third of sales in terms of units. Kirkland accounts for about 28% of Costco’s annual sales.
Costco declined interview requests for this story.

Sam’s Club is trying to raise the quality of Member’s Mark. It showed off apparel, food and other items from the private brand to investors and reporters in early June at an event near its Bentonville, Ark. headquarters.
Melissa Repko | CNBC

A makeover for Member’s Mark

Over the past several years, Sam’s Club has consolidated its private labels from more than 20 different brands into a single one: Member’s Mark. It announced new goals for food and merchandise standards that it aims to reach in 2025, such as switching to antibiotic-free poultry and fair trade certified coffee beans.
And it recently launched a program that allows customers to help co-create Member’s Mark items by giving feedback on flavors, design and more before the retailer green lights an item for the shelf.
Nicholas said customers don’t hold back. “They are exacting, like, ‘Hey, this seam is not good enough or the stitching here needs to be better or this needs to be double stitched or you haven’t got enough lobster in your lobster mac [and cheese],'” he said.
Myron Frazier, Sam’s Club senior vice president of private brands and sourcing, said the company wants to turn Member’s Mark into a well-respected lifestyle brand. He said the store brand plans to go deeper in home categories, such as offering more indoor furniture and making its own line of small appliances.
To come up with popular items, he said merchants have sought out products that solve customers’ problems, such as easy meals like chicken rotisserie bites and mix-and-match kids’ clothing sets that can help parents on a hectic morning before school.

Like Costco’s Kirkland Signature, Sam’s Club has a private brand that cuts across categories including grocery, home decor and apparel. Its private brand, Member’s Mark, also carries seasonal items like patio sets and beach towels.
Melissa Repko | CNBC

Some signs indicate the moves are paying off. Sam’s Club does not share its membership number, but it has reported a record number of members in each consecutive quarter for more than a year.
Customer transactions rose 5.4% and the average ticket declined about 1% in the most recent quarter, which could point to shoppers opting more for Member’s Mark items. The products tend to cost less than national brands.
Nicholas said sales growth of the private brand has outpaced the rest of the store. He added that as its items gain popularity, the club gains leverage to push suppliers to lower prices or step up innovation.
On an earnings call last month, Walmart finance chief John David Rainey credited Member’s Mark for driving the quarter’s high single-digit growth and said it is “a growing reason why members join and renew.”
Product quality will help to determine whether the growth continues.
Since 2020, the year when Crozier’s pool broke, Member’s Mark has launched, tweaked and upgraded more than 1,200 items.
One of those reformulated items? Its inflatable pool.
Crozier said it works well now. And she added that Sam’s Club sells a lot of them.

Don’t miss these insights from CNBC PRO More

NASA will have a spacecraft from Elon Musk’s SpaceX guide the International Space Station’s destruction after its retirement in 2030.
The agency awarded an $843 million contract to SpaceX to build the so-called “U.S. Deorbit Vehicle.”
The SpaceX-built vehicle will effectively destroy the ISS by pushing the station into reentry from orbit.

A satellite image shows an overview of the International Space Station with the Boeing Starliner spacecraft, June 7, 2024.
Maxar Technologies | Via Reuters

NASA will have a spacecraft from Elon Musk’s SpaceX guide the International Space Station’s destruction later this decade, the agency announced Wednesday.
The National Aeronautics and Space Administration awarded an $843 million contract to SpaceX to build the so-called “U.S. Deorbit Vehicle.” The spacecraft will be designed to guide the football-field-sized research laboratory back into the Earth’s atmosphere after retiring in 2030.

The SpaceX-built vehicle will effectively destroy the ISS by pushing the station into reentry from orbit.
“It is crucial to prepare for the safe and responsible deorbit of the International Space Station in a controlled manner,” NASA said in a press release, with the U.S. Deorbit Vehicle needed to “ensure avoidance of risk to populated areas.”

SpaceX’s Dragon crew capsule “Endeavour” seen from the International Space Station on May 2, 2024.

NASA did not specify whether SpaceX’s design for the U.S. Deorbit Vehicle will be based on one of the company’s existing spacecraft, such as its Dragon capsules. SpaceX and NASA did not immediately respond to CNBC’s request for comment on the design.

Sign up here to receive weekly editions of CNBC’s Investing in Space newsletter.

The U.S. – along with four international partner agencies representing Russia, Europe, Canada, and Japan – has been preparing for the eventual end of the ISS, which has been crewed since 2000. The ISS, primarily created as a crewed research laboratory, has seen more than 3,300 experiments conducted in microgravity. That includes research not possible on Earth such as medical sciences and technology demonstrations.

Aging ISS

But the ISS is aging, with NASA and its lead partner Roscosmos, unable to solve a worsening problem of microscopic leaks on the station.

NASA published a study on Wednesday with analysis of why it decided to intentionally destroy the ISS in a controlled reentry. The agency evaluated a variety of alternatives, including disassembling the station in orbit or trying to raise the ISS to a higher orbit with a large spacecraft like SpaceX’s Starship.
“The space station is a unique artifact whose historical value cannot be overstated. NASA considered this when determining if any part of the station could be salvaged for historical preservation or technical analysis,” the agency wrote.
Ultimately, the agency study determined that any attempts to preserve or reuse the ISS were technically or economically infeasible. NASA noted the possibility the ISS’ operational lifetime could be extended beyond 2030, but that is yet to be determined and requires agreement with its international partner agencies.
NASA is planning to replace the ISS through private space stations and is helping fund U.S. companies’ development through the Commercial LEO Destinations (CLD) program.
The ISS totaled about $150 billion to develop and build and costs NASA about $4 billion each year to operate, so the agency sees privately built space stations as a way to replace the ISS at a fraction of the cost. More