Walgreens may have ‘cried too much’ about theft, CFO says

Dive Brief:

Pharmacy chain Walgreens may have inflated concerns of shrinkage, or retail theft, at its stores last year, CFO James Kehoe said during the company’s fiscal first quarter earnings call last week.
The Deerfield, Ill.-based company may have “cried too much last year,” Kehoe said Thursday regarding shrinkage concerns, “when we were hitting numbers that were 3.5% of sales.” It has now stabilized in the 2.6% range, he said.
The company has spent “a fair bit” on measures to address the issue, including hiring private security companies, Kehoe said, acknowledged the security companies “are proven to be largely ineffective.” The company is now working more with law enforcement rather than private security, he said.

Dive Insight:

Walgreens’ first quarter results for the period, ending Nov. 30, 2022, beat estimates partially due to a rise in demand for cough and cold medicine.

Over the past two years Walgreens has repeatedly pointed to organized retail theft as a growing concern for the business. Shrinkage is typically defined as the difference between the inventory recorded on a company’s balance sheet and its actual inventory on the shelves, and takes into account damaged or lost products as well as theft.

During the earnings call, Kehoe said Walgreens “put in incremental security in the stores in the first quarter,” he said.. “Actually, probably we put in too much and we might step back a little bit from that.”

During the company’s earnings call last January Kehoe told investors that the company was “absorbing a 52% increase” in shrink over the past two years, according to an earnings transcript, and highlighted organized retail theft as the impetus behind the increase.

“This is not petty theft. It's not somebody who can't afford to eat tomorrow,” he said in January of 2022. “These are gangs that actually go in and empty our stores of beauty products.”

Shrinkage represented 3.5% of sales last year, Kehoe said during Walgreens’ latest earnings call, but that number is now “in the lower twos, call it the mid-2.5%, 2.6% range,” he said according to a transcript on Seeking Alpha.

“We're quite happy with where we are,” Kehoe said, noting this level is “well below” the levels seen in prior years. A veteran of Kraft Foods as well as pharmaceutical company Takeda, Kehoe has served as global CFO for the pharmacy chain for four years beginning in 2018, according to his LinkedIn profile.

A company spokesperson in an emailed response to questions from CFO Dive wrote that “although we are pleased to see retail shrink levels stabilize, this is still a serious national problem affecting...us and all retailers” and that the company has taken “a number of steps” to combat the issue. The spokesperson declined to address how declining shrinkage could affect Walgreen’s private security spending.

Walgreens reported adjusted earnings per share slumped 30.8% year-over-year to $1.16, a decline Kehoe attributed to headwinds from COVID-19, healthcare growth investments and labor investments.

Though seeing a tailwind from cough and cold medicine sales, the company also reported a $3.7 billion net loss for the quarter, driven in part by the $5.2 billion settlement it paid out for opioid litigation, according to its earnings results.