Walgreens Reports Q3 Loss as Sycamore Acquisition Looms

Walgreens Boots Alliance, one of the largest pharmacy retailers in the United States, reported a significant net loss in its third quarter as the company prepares for its upcoming acquisition by private equity firm Sycamore Partners. The drugstore chain's financial results reflect ongoing challenges in its retail segment, while its pharmacy and international businesses show resilience.

Retail Struggles and Store Closures

Walgreens' front-of-store retail sales continued to decline in Q3, falling 5.3% year over year. This downturn is largely attributed to the company's ongoing store closure initiative, which aims to shutter 1,200 U.S. locations over a three-year period. Same-store sales also suffered, with a 2.4% decrease driven by weak performance in grocery and household items, health and wellness products, and beauty categories.

The retail segment's struggles have contributed to Walgreens swinging to a net loss of $175 million for the quarter, a stark contrast to the $344 million in net earnings reported in the same period last year. This represents a substantial decrease of $519 million year-over-year.

Pharmacy and International Segments Show Strength

Despite the challenges in retail, Walgreens reported positive results in other areas of its business. The company's U.S. healthcare and international segments performed well, helping to drive an overall Q3 sales increase of 7.2% to $39 billion. This growth in pharmacy and international operations has partially offset the losses in the retail segment.

Sycamore Acquisition and Future Outlook

As Walgreens prepares for its acquisition by Sycamore Partners in a deal valued at $10 billion (more than double when including debt and future payouts), the company has withdrawn its financial guidance and did not hold a Q3 conference call. CEO Tim Wentworth emphasized the company's focus on its turnaround plan, acknowledging that it will "require time, disciplined focus and a balanced approach to manage future cash needs with investments necessary to navigate an evolving pharmacy and retail environment."

The impending acquisition has raised concerns about Walgreens' future debt profile. S&P Global Ratings analysts Matthew Todd and Declan Gargan are monitoring the company's credit profile, citing "negative implications" and suggesting that Sycamore may be incentivized to increase leverage to maximize equity returns.

As of the end of Q3, Walgreens reported $429 million in short-term debt and nearly $7 billion in long-term debt. These figures are likely to increase following the Sycamore acquisition, potentially impacting the company's financial stability in the coming years.