Facing anxious investors, Walgreens pledges renewal

CHICAGO —Frigid mid-winter temperatures held attendance at Walgreens’ annual meeting here down to about 700 or so determined shareholders, far fewer than the 2,200 who packed the Navy Pier ballroom last year for the event. But it wasn’t just the weather that gave a chill to the proceedings.

Walgreens’ annual face-to-face with its most loyal investors usually is a festive, and even celebratory, event, capped with a review of the company’s achievements and its bold plans to stay ahead of the retail pharmacy curve. This year, the tone was darker, if no less determined. By turns somber, contrite and confident, Walgreens’ leaders did their best at the Jan. 14 meeting to rally support for a top-to-bottom overhaul of the 108-year-old drug retailer’s market strategy in the midst of an economy in freefall.

Shareholders came looking for signs that Walgreens has a plan to navigate the worst economic upheaval in decades and restore its sales and earnings momentum. Company leaders, clearly sensing concern over Walgreens’ depressed stock price and lackluster sales, took pains to lay out those plans in detail.

Walgreens executives, including board chairman Alan McNally, president and then soon-to-be-named CEO Greg Wasson and new SVP and CFO Wade Miquelon, gave frank assessments of the company’s struggle to regain its sales and earnings momentum in the face of an alarming retreat in consumer spending and confidence. But they also did their best to sell their most loyal shareholders—and the Wall Street analysts attending the meeting—on the high-stakes turnaround plan they’ve put in place for the once high-flying retail juggernaut.

McNally, who succeeded Jeff Rein as interim CEO last fall before Walgreens’ board of directors tapped Wasson for the post in late January, set the tone by acknowledging the company’s current challenges and listing a slew of initiatives.

Those steps, said McNally, are designed to cut bloated costs, recharge store performance and wring “more from the core” of Walgreens’ 6,400-store retail empire and its fast-growing capabilities in clinical care, specialty pharmacy and on-site employer-based health care.

“By combining core strengths developed over more than a century in business with the current transformation that’s under way, we are becoming a more nimble and profitable company,” McNally asserted.

Among the company’s most promising new initiatives: its announcement during the meeting of a major new offering for employers, called “Complete Care and Well-Being.” The program is designed to save employer-based health plan sponsors money by making prices for prescriptions and other health services transparent to employers, and by integrating Walgreens’ worksite health centers, in-store clinics and pharmacies with discount drug pricing [see page 1].

“We believe this new and unique offering plays very well with President Obama’s call for more preventive care and better access,” Wasson told shareholders.

Both executives acknowledged, however, that Walgreens faces a different market than the one that propelled it to the top of chain drug retailing in the 1980s and 1990s. Noting the nation’s current “serious recession,” McNally conceded, “To say a lot has changed…since we met a year ago is the understatement of the year.

“Our stock is down by 23 percent, and down by almost half from our all-time high,” he admited. “Our earnings growth has been significantly reduced. It’s a very ‘un-Walgreen-like’ result for a company that has had 34 years of record sales and earnings.”

Nevertheless, Walgreens continues to enjoy “fundamental competitive advantages,” McNally said, including “the best, most convenient network of community drug stores in America,” an “iconic” and universally recognized brand name and a strong balance sheet and credit rating, which gives the chain “financial flexibility.” He called those strengths “the bedrock on which the transformation of Walgreens is occurring.”

McNally and other leaders laid out the fundamentals of that transformation, including:

A dramatic reduction in store construction and development in order to boost the performance of the company’s existing network of more than 6,400 units coast to coast. Nevertheless, Wasson said, with a long-term growth target of 3 percent more new stores annually, “We will still be opening more stores than any other chain in the industry.”

An intense focus on being, the premier provider of high-quality health-and-wellness services, including in-store clinical care, pharmacist-delivered care, specialty medications and at-home services like infusion. Walgreens’ retail and specialty pharmacies and its nearly 700 in-store and on-site employer clinics, staffed by tens of thousands of professionals, offer “tremendous opportunity” to present the chain as a cost-saving health alternative, said McNally.

Recharging front-end category performance by weeding out slow moving and redundant items and offering more of what the company is calling “affordable essentials” like detergent, mouthwash, shampoo and batteries. “We’re reviewing every cat of merchandise in our stores,” Wasson said. With the overhaul of the baby category, for instance, Walgreens drove up average shopping basket sales in that category by 41 percent, he said. In an exclusive interview following his elevation to CEO, Wasson elaborated. “At the front end of the store, we’re really focused on trying to be relevant to what the consumer is looking for,” he told Drug Store News (Complete coverage of that interview will appear in a Walgreens special report in the March 2 issue).

“Rewiring for growth,” by cutting operating costs through labor savings and initiatives like Power, a workload balancing project that offloads much of the dispensing workload from individual Walgreens pharmacists to centralized processing centers. The Power project is already saving costs in 280 Florida stores, and will be in place in some 760 stores by the end of fiscal 2009, Wasson told shareholders. To reduce overhead, Walgreens also recently announced a reduction of 1,000 headquarters staff and field management positions this year. After the meeting, senior vice president of operations Mark Wagner said all 29 of the company’s regional operations vice presidents would be moved out of headquarters in Deerfield, Ill., and into their respective regional offices to put them closer to customers. “It’s about reducing costs and improving our productivity,” Wasson explained.

An effort toward “broadening and deepening” Walgreens’ relationships with health plan payers, in Wasson’s words, through programs like Complete Care and Well-Being. “We have payers that represent over a billion dollars in prescription sales to this company,” he said.

Together, these initiatives will allow Walgreens to ride out the current economic storm in firm control of its destiny, said company leaders. “We’re moving management and accountability for performance closer to the customer and the communities we serve,” McNally said. “With our core strengths developed over more than a century, and the transformation of the company that’s underway, Walgreens has truly exceptional opportunity for profitable growth.”

Walgreens, he concluded confidently, will “emerge from this severe economic downturn even stronger, with greater market share, by providing the most convenient to consumer goods and services and pharmacy health-and-wellness services in communities across America.”

Added Wasson, “We are navigating extremely difficult retail waters today. We’re also in the midst of a major transformation of Walgreens.”

Nevertheless, he added, “I’ve never been more excited about the future of this company.”