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April 2, 2019

The worst isn't over for Walgreens

By CNN BUSINESS

Nothing is going right for Walgreens Boots Alliance.

The US and UK drug store giant reported earnings and sales that missed forecasts Tuesday and also issued a weak profit outlook for the rest of the year. Shares of Walgreens plunged more than 10% on the news.

Walgreens now intends to cut costs more quickly in order to boost profit. Walgreens CEO Stefano Pessina said during a call with analysts the company's goal is to slash expenses by more than $1.5 billion annually, up from an earlier promise of $1 billion in cost reductions.

Walgreens and its key rival CVS face a litany of challenges, including lower prices for generic drugs and a persistent decline in reimbursement rates for medications from state and federal government health care plans.

Increased drug store competition from Walmart and Amazon is hurting Walgreens and CVS. Amazon bought online pharmacy PillPack last year.

There are also concerns about Amazon's plans to launch a new health care venture called Haven with Warren Buffett's Berkshire Hathaway and banking giant JPMorgan Chase. Haven has pledged to lower health care costs for the employees of those three companies.

'Most difficult quarter' for Walgreens

Walgreens and CVS are also being squeezed in the front end of the store by Amazon and Walmart --- as well as by Costco and dollar store chains like Dollar General. They all offer a lot of the same products you can get at drug stores for much lower prices, both online and in physical stores.

Walgreens has also been hit by a crackdown from the Food and Drug Administration, which said earlier this year that it was putting the company "on notice" for selling more cigarettes to minors than any other drug store retailer.

The FDA now wants to meet with Walgreens to discuss the sale of tobacco and e-cigarettes to teens.

Brexit uncertainty isn't helping Walgreens either. The company said during a conference call with analysts that sales in its Boots UK stores fell during the quarter as "consumer conditions in the UK remain challenging."

Pessina acknowledged all of these issues in the company's earnings release Tuesday.

He said this was "the most difficult quarter we have had since the formation of Walgreens Boots Alliance" at the end of 2014.

He added that the company has begun to address its numerous challenges, but the response "was not rapid enough."

Cutting costs and looking to CBD to boost sales

Walgreens is taking steps to try and rejuvenate sales, most notably with plans to soon begin offering products containing CBD --- the non-psychoactive component of cannabis that many believe helps relieve stress and has other health benefits.

A spokesperson for Walgreens told CNN Business that the company will sell CBD topical creams, patches and sprays in nearly 1,500 stores in nine states.

"This product offering is in line with our efforts to provide a wider range of accessible health and wellbeing products and services to best meet the needs and preferences of our customers," Walgreens said in an email to CNN Business.

Still, CBD won't be enough to get Walgreens back on track anytime soon.

Shares of Walgreens are down nearly 20% this year, making it the worst performing stock in the Dow. CVS, which fell 4% Tuesday, has plummeted more than 20% so far in 2019, too. And analysts are still bearish on their near-term outlooks.

Drug pricing, reimbursement and overall healthcare costs continue to be headwinds for the sector, said Moody's analyst Mickey Chadha in a report Tuesday. He added that the upcoming US election cycle is creating "uncertainties in the overall healthcare regulatory environment."

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