How Teeny-Tiny VillageMD Brought Walgreens Its First Net Loss in 122 Years

Since its founding in 1901, Walgreens has never experienced a loss. For 122 years, through depressions, wars, and recessions, it has not once had a losing year. Then it bought VillageMD and CityMD...

As I mentioned before, buying primary care is easy. Actually providing quality primary care is hard. Someone should’ve told Walgreens. Tiny VillageMD, which represents only 3.3% of Walgreens’ business (based on the 2023 revenue reported yesterday), contributed 50% to its 2023 net loss of $3 billion, marking the first loss in the company’s 122-year history!

I don’t appreciate the fact that Walgreens’ management is trying to play the “recurring charges” game. They are essentially saying that part of the loss is attributed to the expenses associated with the VillageMD and CityMD purchases, $6.2 billion and $3.5 billion, respectively. But that’s nonsense, and they know it. Walgreens contradicts itself in the same 10-K SEC report published yesterday. Initially, they state that the increase in selling, general, and administrative expenses was partly due to the “VillageMD clinic expansion.” Then, just a few pages later, they say that “the closure of approximately 60 [VillageMD] clinics in fiscal 2024” was approved.

Credit: robclarke.com

Since its founding in 1901, Walgreens has never experienced a loss, maintaining profitability for 122 years through depressions, wars, and recessions. Charles R. Walgreen always prioritized frugality, efficiency, and cost-cutting. A glance at Walgreens’ profitability chart reveals not only a consistent positive trajectory but also an upward trend, as the original concepts of cost-cutting and scalability have continuously played a central role in improving profitability margins.

The Prohibition era was one of the best times in Walgreens’ history. Although alcohol was illegal, prescription whiskey was available and sold by Walgreen Co. For a price equivalent to about $40 today, one could obtain a prescription for medicinal liquor, allowing for about a pint a week.

In 1922, Walgreen Co. introduced its famous ‘malted milkshake.’

In 1927, Walgreen Co. was listed on the New York Stock Exchange.

By the end of 1929, there were 397 Walgreen stores across 87 cities, with annual sales reaching $47 million and net earnings of $4 million.

The 1929 stock market crash and the subsequent Great Depression had little to no effect on Walgreen Co. In fact, sales actually rose in 1930, reaching $52 million.

By the end of the 1970s, Walgreen Co. operated 688 drugstores, with sales of $1.34 billion and earnings of $30.2 million.

In 2010, Walgreen Co. acquired the New York City-area chain Duane Reade for $1.075 billion.

Between 2012 and 2014, Walgreen Co. paid a total of approximately $15.3 billion for a 55% interest in Alliance Boots, a large European pharmacy chain. The combined company was named Walgreens Boots Alliance (WBA).

The COVID-19 pandemic in 2020 posed significant challenges for Walgreens. While it did administer vaccines, this was not without costs, as foot traffic decreased tremendously.

However, wars, recessions, Prohibition, the Great Depression, the Great Recession, the COVID-19 pandemic, and other adverse events of the last century have not done as much damage to Walgreens as the decision to buy the highly unprofitable VillageMD and CityMD in 2021 and 2022, respectively. As a result, for the first time in history, Walgreens had a losing year—a year they surely want to forget.

Take a look at the snapshot of Walgreens’ net profit history:

1929: $4 million

1979: $30.2 million

1990: $174.6 million

2000: $776.9 million

2010: $2.1 billion

2014: $1.9 billion (expenses associated with the Alliance Boots merger)

2015: $4.3 billion

2018: $5.0 billion

2019: $3.8 billion

2020: $180 million (COVID-19 challenges)

2021: $2.0 billion

2022: $4.3 billion

2023: -$3.1 billion (losses and write-offs mainly associated with the purchases of VillageMD and CityMD)

It only took the board a few months after the transactions were finalized to realize that they had made a horrible mistake and that they hadn’t thought the primary care move through. The board never took responsibility and instead blamed the management. The CFO, CIO, and CEO were quickly fired, and the shutting down of VillageMD and CityMD began. “Cutting losses” seems to be the right thing to do at this juncture.

Expenses associated with VillageMD are roughly half of the total 2023 loss of a whopping $3 billion. The other half is attributed to the well-known phenomenon in finance called “kitchen sinking,” when all the company’s problems are blamed on the previous management, and the opportunity is used to clean up the balance sheet and write off assets.

The Walgreens (ticker: WBA) stock price went up 7% yesterday. The key new information I saw in the earnings report was the explicit mentioning of the VillageMD clinics’ closure. I’m certain CityMD clinics will also be closing, as CityMD has been highly unprofitable for Walgreens. While this is horrible news for patients and clinicians who are being laid off, the market interprets the news as the new Walgreens management admitting that the previous management made mistakes and is cutting losses early—like right away—the CityMD deal was closed in January. Hopefully, in this example and also going forward, the new Walgreens management will be less emotional and more long-term oriented compared to the previous management.

Another sign that Walgreens is giving up on VillageMD, a primary care chain 63% of which it acquired only two years ago, is that Walgreens is actively promoting Walgreens Virtual Healthcare for its telehealth services and is completely silent on the fact that VillageMD has had its own telehealth service for a number of years.

How do such poor management decisions arise? One might assume that CEOs attend top business schools, learning how to be rational and serve in the best interests of their shareholders. Yet, when they enter the real world, emotions and peer pressure suddenly begin to drive their business decisions. It’s mind-boggling.

In the case of VillageMD, I imagine it happens something like this. This is a hypothetical re-enactment. Don’t try this at home. 😉

After yet another intense boardroom meeting, CEO calls her CFO and says to him, “Jim, you know, the board is really on my case. They keep mentioning Amazon and that it’s taking over. As you know, our stock price has been suffering since that dreadful Amazon decision to get into the pharmacy market with PillPack. The board is pressing me to do something about the stock price. What can we do? They're convinced that we must match whatever Amazon is doing to show them that we also mean business. What is Amazon cooking up there? Do you know?”

CFO answers, “Well, there are rumors they’re going into primary care to complete their dominance in healthcare.”

CEO continues, “Well, to please the board, we have to go into primary care. What’s out there that sounds good and maybe value-based? We need to please our shareholders to make sure that they’re happy.”

CFO replies, “Well, there is not much out there in terms of national presence. Every national primary care chain is highly unprofitable. As you know, we already have a small share in VillageMD. So maybe it makes sense to increase our ownership and to become the majority holder?”

CEO responds, “Okay, that sounds good. Let’s do it.”

CFO reacts, “Well, shouldn’t we look at their financials and discuss the strategy and how this important decision is going to affect Walgreens’ business and its customers?”

CEO responds, “Well, that’s what the board seems to want. Didn’t you just tell me that there is not much to choose from and every national primary care chain is unprofitable?”

CFO says, “Well, yes, but...”

CEO interrupts and ends the conversation, “All right, it’s decided. Let’s just do it.”

And…scene.

This brings us to Walmart and ChenMed: