Wal-Mart's drug problem: pharmacy business drags on profit

Tue Aug 18, 2015 9:06pm EDT
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By Nathan Layne

CHICAGO (Reuters) - The world's largest retailer has a drug problem.

Wal-Mart Stores Inc said on Tuesday that lower margins in its pharmacy business had emerged as a drag on profits, as it gets paid less by drug plan managers and as fewer customers pay in cash, since Obamacare has increased the ranks of insured Americans.

The company warned that the margin squeeze would continue for at least the remainder of the year, although a spokesman told Reuters the pharmacy business is profitable and that Wal-Mart has no plans to sell it or find a partner to share the risk.

The disclosure comes as retailers weigh the merit of running drugstores on their own. In June, Wal-Mart rival Target Corp (TGT.N: Quote) agreed to sell its loss-making pharmacy division to CVS Health Corp (CVS.N: Quote) in a deal that will see CVS operate the pharmacies in 1,600 Target stores.

"We feel the decision we've made to run our own pharmacies is right for our business and shareholders," spokesman Randy Hargrove said on Tuesday.

Wal-Mart said its margins were being pinched by two factors: reduced reimbursement rates from pharmacy benefit managers, or PBMs, which administer drug plans for employers and insurers, as well as a drop in high-margin cash transactions.

Wal-Mart lowered its full year earnings-per-share forecast to a range of $4.40 to $4.70 from $4.70 to $5.05. The new forecast includes an 11 cent hit from lower pharmacy margins and other "unplanned headwinds" such as an increase in in-store theft.

On an earnings call, Chief Financial Officer Charles Holley said the pharmacy margins were falling due to lower reimbursement on "some of the main drugs", without offering further details.   Continued...

A taxi driver drives past a Wal-Mart store in Mexico City March 24, 2015. REUTERS/Edgard Garrido