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Diving certificate:

• To tighten its belt, Walgreens will close about 1,200 stores over the next three years, starting with about 500 in the current fiscal year that just began.
• That’s more than half the number of stores the drugstore retailer acquired from Rite Aid seven years ago after it canceled its planned merger.
• The retail business weighed on results: fourth-quarter retail sales fell 3.5% year-over-year, with comparables down 1.7%, while full-year retail sales fell 4.6%, with comparables down 3.4% % decreased, as shown in a results presentation. Beauty, seasonal and general merchandise declined approximately 150 basis points from fourth-quarter comparables, and increased shrink offset the positive impact of category mix and private label on retail-adjusted gross margin.

Insight into the dive:

Walgreens is recovering from a difficult period that included executive restructuring and several rounds of layoffs. CEO Tim Wentworth warned months ago of a significant number of store closures, noting that about a quarter of its 8,700 U.S. stores were underperforming.

The company ended its fiscal year with a ballooning year-over-year loss of $15.4 billion for the year and $3.1 billion in the fourth quarter. For the quarter, companywide revenue increased 6% year over year to $37.6 billion and increased 6.2% for the full year to $147.7 billion.

Wentworth said earlier this year that profitability and attrition were two variables that would determine the company’s store closure plans; In its presentation on Tuesday, the company said more specifically that its considerations include cash flow benefits, underperforming owned locations and expiring leases. About a quarter of Walgreens stores are either owned locations or their leases have expired, and another quarter have leases that are within four years of the expected closing date.

These plans will be “immediately cash flow accretive, net of closing costs,” with these benefits scaling as leases expire; Selling owned businesses generates working capital and sales proceeds that are “significantly greater than cash closing costs”; and closures could also allow the company to sublease or utilize lease-purchase agreements that reduce the cost of paying rent on a closed location, the presentation said.

But “the closure of so many stores is emblematic of a company that is in trouble and trying to correct its course,” said Neil Saunders, managing director of GlobalData. It also raises the prospect of more pharmacy deserts in the U.S., where people lack access to medications and other health services, he said in emailed comments.

“Walgreens has spent years building its business through acquisitions while completely neglecting the fundamentals of its stores and retail operations,” he said. “This has put many branches in a situation where they are now losing sales and not generating a return. Removing the dead wood will help the company strengthen its finances over time, but it is ultimately a major admission of failure.”