Returning ESI patients, strong start to loyalty program has WAG executives bullish for 2013

DEERFIELD, Ill. — Though total same-store sales were down 8%, Walgreens Friday morning characterized a first quarter lifted by a steady influx of returning Express Scripts patients and driven by a steady stream of new Balance Rewards members. The Chicagotown retailer has signed 45 million Walgreens faithful since mid-September. "Today, we have the wind at our backs as we head into a new calendar year," Walgreens president and CEO Greg Wasson told analysts Friday morning.  

Wasson identified three major growth drivers that all revolve around transforming what it means to be a drug store: transforming the retail pharmacy shopping experience through enhanced Well Experience format stores; transforming retail pharmacy's role in the delivery of health care; and establishing the first global retail pharmacy presence through its strategic partnership with Alliance Boots and the creation of a new combined entity — Walgreens Boots Alliance Development.

To date, Walgreens fields more than 400 Wellness Experience stores, having expanded the format from the Indianapolis market to Arizona and Florida. Incorporated within those Wellness Experience is an eye-catching beauty department that's enhanced by the addition of niche and prestige brands not typically found in the drug channel, Wasson said. 

Walgreens across its store base has also improved its private-label penetration by 200 basis points to 22%, driven primarily by the company's Nice! and DeLish brands. 

Another significant enhancement to the shopping experience across all Walgreens' mulitmedia customer platforms is the company's new loyalty program Balance Rewards. Of the 45 million Balance Rewards card holders, 2.5 million have already redeemed accumulated points, Wasson reported. "[Balance Rewards] is a new kind of currency in place that will drive our front end business," he said. 

From the back bench, Wasson noted that one of the more apparent proof points that Americans have already embraced the rapidly evolving role of pharmacy in the delivery of health care is flu shots. Walgreens has delivered more than 5 million shots to date in what is anticipated to be a strong season. Walgreens has been steadily expanding its vaccination offerings beyond flu shots to include year-round offerings like travel vaccines, Wasson said. 

Walgreens has been focused on co-locating the company's Take Care Health nurse practitioners with pharmacists as part of a strategy to steadily expand the company's acute and chronic care and primary screening offerings. And in the past quarter, Walgreens has been named the preferred provider for three of the top five Medicare Part D health plans: United, Humana and Coventry. 

With regard to Alliance Boots, "we're making steady progress in executing this partnership," Wasson reported. "[We have] six teams of employees from both companies … hard at work," Wasson said, to identify and capitalize on synergies across "procurement, merchandising and best practices." One early example of the across-the-Pond synergy is the debut of Alliance Boots' prestige beauty brand No7 in Walgreens' Los Angeles flagship store "with very good results," Wasson said. 

Commenting on the company's first-quarter results, Wasson identified four significant factors that are serving as a stable base from which to grow into 2013. "We are seeing a strengthening of our core business," Wasson said, based in part on the steady stream of returning Express Scripts patients.

“We look for [Walgreens/Express Scripts] customer re-activation and contribution from Alliance Boots to be especially significant beginning in 2Q," noted Cantor Fitzgerald analysts in a research note. "With two full months of the new [Walgreens/Express Scripts] agreement in place, we believe that the November monthly sales showed further improvement in script volumes and customer traffic following a disappointing sales performance in both September and October.”

Other factors Wasson identified included a gross profit margin lifted by increased generic utilization, significant progress across its aforementioned loyalty, vaccination and private label programs and an Alliance Boots partnership that's on track to meet the company's expectations to date.

“During a quarter that included a number of nonoperational items, as well as the ongoing Express Scripts impact, we saw the underlying performance of our business strengthen with improved gross profit margins and an upswing in comparable prescriptions filled in the quarter,” Wasson stated. “In many respects, this quarter was a turning point with the increasing pace of return of Express Scripts customers to our pharmacies, as well as the enthusiastic customer response to our Balance Rewards program," he said. "In addition, we saw strong demand for flu shots and other immunizations, which has continued into the month of December.” 

First-quarter sales were down 4.6% from the prior-year quarter to $17.3 billion. Brand-to-generic prescription drug conversions negatively impacted sales by $883 million, or 490 basis points in the first quarter, Walgreens reported. Front-end comparable store sales decreased 2%, while customer traffic in comparable stores was down 4.2% and basket size was up 2.2%.

Prescription sales, which accounted for 63.8% of sales in the quarter, decreased 7.2% compared to the year-ago quarter, while prescription sales in comparable stores decreased 11.3%. The company filled 201 million prescriptions, a decrease of 3.2% over last year’s first quarter. Prescriptions filled in comparable stores decreased 4.8% in the quarter, an improvement of 320 basis points from the 800 basis point decrease in the fourth quarter of fiscal 2012. The improvement was due primarily to the company’s return to the Express Scripts pharmacy network on Sept. 15, Walgreens reported. 

In the first quarter, the company opened or acquired 218 new drug stores compared with 71 in the year-ago quarter.