Walgreens drives accelerating renewal program

DEERFIELD, Ill. — In a resounding declaration that its massive revitalization efforts have been the right strategy at the right time, Walgreens on Wednesday reported its net earnings jumped to a record $580 million in first quarter fiscal 2011, rising nearly 19% over prior-year levels. Sales for the period ended Nov. 30 also rose 6% to $17.3 billion, another record for the nation’s top drug retailer.

Comp-store sales gains remained relatively anemic in the face of tough prior-year comparisons and a down economy, rising 0.8% overall and 0.4% at the front end. But pharmacy sales continued to trend upward, rising 5.3% chain-wide and accounting for 65.8% of total sales. On a same-store basis, prescription sales were up 0.9%.

Walgreens filled 202 million prescriptions in the quarter, an increase of 4.6% over last year’s first period, and the company attributed 0.8% of that gain to an increase in the number of 90-day prescriptions sold at its 7,651 drug store and hospital pharmacies.

The strong results were ahead of Wall Street projections, and affirmed the company’s strategic direction since Walgreens launched a top-to-bottom overhaul of its retail strategy, its bloated cost structure and its overstocked merchandise mix two years ago.

In a buoyant conference call with financial analysts this morning, Walgreens president and CEO Greg Wasson and other executives expressed deep satisfaction with the first-quarter results. “This was a particularly strong quarter in terms of earnings growth as we continue our focus on gross profit margins and controlling our costs,” Wasson said, especially in light of the fact that “we were up against a very strong quarter a year ago as well. We also generated $1.2 billion in cash flow from operations, reflecting our overall strong drug store performance.”

Wasson attributed the strong gains to “[our] continued focus on gross profit margins, cost control and the strategic slowing of our new store openings. As a result of improved merchandising, including promotions and pricing, we saw significant increases in gross profit margins in the front end,” he said. Walgreens’ merchants, the CEO added, are working “to strike the right balance between margin and sales” at the front end. “We’re sourcing product globally, and having great results from our recently opened office in Hong Kong. And we’re managing our pricing models and promotional investments. All of this is having a positive impact on front-end margins.”

Front-end merchandising initiatives continue at a strong pace. “We continue to expand our new beer and wine convenience category,” Wasson said. “We’re now in nearly 5,000 stores, up from just under 2,000 in November 2009, and that growth has contributed more than 75 basis points to the front-end comps.”

In addition, said Walgreens’ CEO, “our ‘Fresh Food’ initiative is bringing healthy products to food deserts [in] Chicago and other select locations.”

Walgreens also is beginning to reap the benefits of its acquisition last spring of 257-store Duane Reade in New York, according to company executives. “We’re taking the best of Duane Reade’s approach to urban retailing of beauty and expanding it into select Walgreens stores. We’re also integrating the best of Walgreens’ pharmacy expertise into Duane Reade.”

The chain also is benefiting from its sweeping Customer Centric Retailing initiative, which is transforming the way stores are merchandised with a tighter, faster-turning mix of product, improved department adjacencies and signage at the front end, and a better read on local consumer spending preferences. “As we roll out our Customer Centric Retailing initiative across the chain, we’re seeing improved sales, increased efficiencies, lower inventory and a better customer experience, evidenced by our improved customer satisfaction scores,” Wasson said. “We call it a four-way win ... reflected in our front-end comps, gross margins and SG&A.”

The company already has converted or opened some 2,100 Walgreens drug stores with the CCR overhaul, company leaders reported, and will have transitioned some 5,500 stores (70% of the chain) to the CCR format by the end of the year. “CCR, along with other initiatives, is helping us serve customers more effectively, and is driving better results for the front end,” Wasson said.

Wasson noted that the company’s second quarter would be heavily influenced by the Christmas selling season, including the final few days of pre-Christmas sales this week. “We opened the season with a solid Thanksgiving weekend, but this is an important week for us,” he acknowledged. “With our stores open Christmas Eve and Christmas Day, we are an ideal destination for last-minute shoppers.”

Walgreens also remains sharply focused on its cost-reduction and productivity efforts, which Wasson said are on track to save the company $1 billion by the end of fiscal 2011 compared with a base year of 2008.

Despite the strong results, Wasson and Wade Miquelon, Walgreens EVP and CFO, warned that headwinds remain as the company moves through 2011. “We believe it’s important to remain very focused on the economic outlook and the challenges it presents for our business in the quarters ahead,” Wasson said. “Unemployment remains high at 9.8% across the country, spending on discretionary items remains slow and value continues to be a priority for customers. We are convinced that the new consumer, focused on convenience, value and day-to-day necessities, is here to stay, and we intend to be well positioned to serve her needs.”

In addition, Wasson said, “we expect to see continued pressure from third-party payers, including the government.” And “while it’s too early to speculate on the eventual impact of AMP [the federal average manufacturer price guidelines for Medicaid generic drug prescription reimbursements], states will continue to experience budget difficulties,” he warned. “And, as a result, we anticipate increased reimbursement pressures” at the pharmacy.

Miquelon also warned that Walgreens would face “volatility quarter-to-quarter” in the coming months, due to uncertainty over the timing of new generic drug introductions for big-selling branded products, ongoing pharmacy reimbursement pressures and the still-uncertain economic outlook.

Despite continuing economic and political uncertainties, Wasson added, “our results this quarter demonstrate that the execution of our core strategies is generating the results we want to achieve. We’re seeing the impact of slowing store openings in our performance — we’re on track for store openings of 2.5% to 3% in fiscal 2011, compared with nearly 9% growth just three years earlier.”

At the pharmacy, said Walgreens pharmacy services president Kermit Crawford, the flu shot program continues to gain new adherents. “At end of this week, we will have administered over 6 million flu shots,” he told analysts. “Our goal is to remain the leading provider of flu shots in this country.”