Walgreens Boots Alliance Inc. (WBA.O) shares dropped Tuesday after the drugstore chain said that it will expand by more than US$500 million a plan to cut costs, as declining reimbursement for prescription drugs cut into its profit margins.

• Earnings growth will be flat in fiscal 2019, the company said, after previously predicting growth of 7 per cent to 12 per cent.

Key Insights

• While Walgreens is filling more prescriptions at the pharmacy counter, it’s making less money on them -- a worrisome sign for a key part of the business. Prescription sales in its U.S. stores rose 9.8 per cent in the second quarter, but gross profit at the pharmacies fell 3.2 per cent.
• As pressures mount on stand-alone drugstore chains, Walgreens is looking to cut its way to greater profitability. It plans to expand a planned US$1 billion of annual cost cuts by fiscal 2022 to at least US$1.5 billion. Walgreens said the savings will come from streamlining operating and digitizing some business functions.
• Walgreens knows things are bad: “The market challenges and macro trends we have been discussing for some time accelerated, resulting in the most difficult quarter we have had since the formation of Walgreens Boots Alliance,” Chief Executive Officer Stefano Pessina said in a statement about the quarter, which ended on Feb. 28.

Market Reaction

• The shares fell in early trading, declining 6.4 per cent to US$59.40 at 7:12 a.m. in New York before the market opened.