Walgreens stands by its rapid growth strategy

CHICAGO Neither the downward-turning economy nor its own recent profit woes will derail Walgreen Co.’s strikingly aggressive store-growth strategy or its long-range pursuit of new business opportunities in specialty pharmacy and front-end merchandising, company leaders affirmed today.

Addressing hundreds of shareholders at the company’s annual meeting here, a chastened but determined chairman and chief executive Jeff Rein outlined bold growth plans for Walgreens. Rein’s optimistic forecast for Walgreens long-term came despite recent difficulties in reining in operating costs, and despite a sliding stock price that hit a new 52-week low even as shareholders packed into Chicago’s Navy Pier ballroom for the event.

Walgreens’ chairman acknowledged that the past year has been a tough one for the nation’s premier drug chain—particularly the fourth quarter, when unexpectedly high operating costs, a mild flu season and difficult comparisons with the previous year cut earnings by 3.8 percent. “I’m sure most of you are asking, how could we miss a quarter like that?” Rein noted. “We lost focus on payroll and expenses.”

While citing the need to remain vigilant in areas like expense controls, Rein said Walgreens began the new year “on a really, really strong financial footing,” with first-quarter per-share earnings up 5.5 percent in the midst of a record store-opening campaign that saw the addition of 168 new stores. And he laid out a store-construction plan that he said would easily put Walgreens ahead of its long-stated goal of 7,000 stores coast to coast by 2010.

“We’re ramping up our organic growth to 550 new stores this fiscal year, for a net increase of 475 after relocations and closings,” Rein told shareholders. “We’ll step this up to more than 600 new store openings in fiscal 2009.”

The primary focus of that new-store construction, he said, will be the Northeast and Southern California.

“We’re targeting about 8 percent growth annually in our square footage through fiscal 2009 and beyond,” he said. “Long-term, we see the potential for 13,000 Walgreens stores across the U.S. Yes, there’s some cannibalization in the first year or so after we open a new store, but eventually every store in the area keeps growing, and overall share jumps.”

Walgreens is also stepping up its purchase of prescription files from hard-pressed independent pharmacies going out of business, he said. Last year, the company bought some 200 independents’ files, in many cases retaining the owner as well to work in a nearby Walgreens pharmacy. More recently, Walgreens purchased the patient files from 27 Rite Aid stores in Las Vegas.

Another major focus: Walgreens’ growing push into highly specialized pharmacy services. Rein also reiterated the company’s commitment to in-store clinics through its Take Care Health format.

Behind the non-stop growth strategy: the company’s “absolute” determination, said its chairman, to be in the “sweet spot...where health needs converge with those convenient points of care” as the nation’s population ages.

Rein also drew a clear distinction between his company and CVS, whose purchase last year of giant pharmacy benefit manager Caremark drew praise from Wall Street and talk of a new pharmacy business model. “We have no plans at all … to purchase a major PBM,” he asserted. “We believe our independence from a large PBM differentiates us and enables us to successfully compete for business as the provider of choice.”

That hands-off approach “promotes transparency as we work with health care providers and insurance plans to offer the best overall pharmacy care for their patients,” he added.

Joining Rein onstage was Walgreens’ recently elected president and chief operating officer, Greg Wasson. In a forceful reaffirmation of the company’s core operating principles, Wasson revealed new plans for “leveraging the box” inside Walgreens stores with new services and partnerships with other major service provider companies like Starbucks and DHL. Among the new offerings: Cafe W, offering full-service coffee and fountain drinks in more than 200 locations; DVDs on demand in the photo department, printer cartridge refills, and Red Box video rentals for $1, now offered in four Walgreens units on a pilot basis.

“We want to leverage our prime real estate and 6,000-plus stores,” he said, with “more high-value products and services.”

In line with that effort, Wasson said the company would expand its Take Care Health Services clinics to more than 400 Walgreens stores by the end of calendar 2008, up from 135 operating today. “Some of our first clinics, just over a year old, are surpassing the break-even point,” he revealed. “Take Care is the platform we intend to use to bring additional health care services to markets, such as immunizations and wellness programs.”

Wasson also expressed the company’s determination to grow in the specialty pharmacy and home infusion business. “This is a $60 billion sector growing at nearly 20 percent annually,” he said. “That’s why we acquired Medmark Specialty pharmacy a year ago and Option Care Specialty/Infusion Pharmacy this [past] spring. Combining these two companies with our organically grown business, we’re now the No. 1 independent specialty pharmacy company.”