Backed by strong Q1 results, Walgreens is rethinking how retail is done in 2018


As good as Walgreens performed behind the back bench this past quarter, the company’s continued focus on enhancing its beauty offerings is expected to lead improvements across the front-end as Walgreens plans to amalgamate the many store format pilots it has been testing into one of many yet-to-be-identified stores.

“Over the past few years we have been conducting pilot studies in certain U.S. stores to test our merchandising, format, supply chains and beauty propositions and a number of new initiatives,” Stefano Pessina, executive vice chairman and CEO Walgreens Boots Alliance, shared with analysts Thursday morning. “In 2018, you will see us deploy the first pilot stores [integrating] all the work we have done to date in a single format. We will study the results in depth and fine tune the format before rolling this new concept [out] under the ongoing store rejuvenation [initiative] and within our current capital plan. However, this is about much more than just our retail offering. It is about rethinking and redefining our presence in and relevance to the communities we serve. That requires us to rethink our supply chains, the services we offer to our customers and how we deliver those services. This is why strategic partnerships like the one we have done with FedEx are so important. [It] gives us an additional role in the community, provides flexibility in how we physically move things in and out of our stores, and that creates a completely new way of thinking about how we interact with our patients and our customers.”

[quote-from-article] For the third quarter, Walgreens’ U.S. pharmacy business was hitting on all cylinders. Pharmacy sales, which accounted for 72.4% of the division’s sales in the quarter, increased 14.1% compared with the year-ago quarter, primarily due to higher prescription volumes, including mail and central specialty following the formation of AllianceRx Walgreens Prime. Comparable pharmacy sales increased 7.4%, primarily due to higher volume.

And the division filled 260.2 million prescriptions (including immunizations) adjusted to 30-day equivalents in the quarter, an increase of 9.5% over the year-ago quarter. With that, Walgreens reached a significant milestone – exceeding 1 billion prescriptions filled on a 30-day adjusted and rolling annual basis.

Many of those prescriptions are being filed by patients through digital means, noted George Fairweather, Walgreens Boots Alliance executive vice president and global CFO. “In the quarter, over 20% of Walgreens’ refill scripts were initiated through digital channels, demonstrating the impact of the work we are doing to improve our digital capabilities,” he said. “This includes the progressive enhancement of the Walgreens mobile app, which has been downloaded more than 50 million times since its launch [and has earned] a five-star customer rating on the Apple store.”

And even though retail sales for the Deerfield, Ill.-based drug chain decreased 2.8% in the first quarter compared with the year-ago period, with a 0.9% decline in same-store sales, Walgreens is excited about its enhanced beauty position moving forward. “Declines in consumables and general merchandise were partially offset by sales growth in the health and wellness and beauty categories,” Alex Gourlay, Walgreens Boots Alliance co-COO, explained to analysts Thursday morning. “This is the sixth consecutive quarter that we’ve delivered comparable sales growth in both the health and wellness and beauty categories.”

Overall, beauty represents 9% of total retail sales at Walgreens. “We continue to invest in our beauty differentiation program and are encouraged by the results,” Gourlay said. “We have now completed the introduction of our enhanced beauty offering to over 1,000 additional stores, bringing the total number of stores with this offering to around 2,900. I’m pleased to report that during the first quarter the beauty differentiation stores performed stronger than in prior quarters. Beauty category sales in these stores continue to be markedly better than in other stores, resulting higher retail gross margin and higher retail comparable sales. … Given how well our beauty offering has been received, we are looking to widen the range of products offered in our beauty differentiation initiative.”

Walgreens Boots Alliance reported first quarter U.S. sales of $22.5 billion for the period ended Nov. 30, an increase of 8.9% over the year-ago quarter. Sales in comparable stores in the U.S. market increased 4.7% compared with the same quarter a year ago.

“I am pleased that we delivered another strong performance in the first quarter, led by continued prescription volume and market share growth in Retail Pharmacy USA. At the same time, we continue to position our company for future growth with the acquisition of the first Rite Aid stores following regulatory clearance for the transaction in September," Pessina said. "Since the end of the quarter, we announced an agreement to acquire 40% of Sinopharm Holding Guoda Drugstores, a leading retail pharmacy chain in China, where regulatory changes have allowed us to prioritize retail opportunities. We also have accepted an offer to sell part of our investment in our Chinese wholesale partner Guangzhou Pharmaceuticals Corporation for a substantial cash return.”

The company continues to expect to complete integration of the acquired Rite Aid stores and related assets by the end of fiscal 2020, at an estimated cost of approximately $750 million. As previously announced, the company plans to spend approximately $500 million of capital on store conversions and related activities. The company also continues to expect to realize $300 million in annual synergies within four years of the initial closing of this transaction.

Overall sales in the first quarter for Walgreens Boots Alliance totaled $30.7 billion, an increase of 7.9% from the year-ago quarter, and an increase of 7.2% on a constant currency basis.

During the quarter, the company completed its $5 billion share repurchase program announced in June 2017 and the $1 billion expansion of that program announced in October 2017.

The company raised the lower end of its guidance for fiscal year 2018 by 5 cents per share and now anticipates adjusted diluted net earnings per share of $5.45 to $5.70. This guidance does not take into account any impact from the recent U.S. tax legislation, and assumes current exchange rates for the rest of the fiscal year.

Retail Pharmacy International had first quarter sales of $3.1 billion, an increase of 4.1% from the year-ago quarter due to currency translation. Sales decreased 0.8% on a constant currency basis. Pharmaceutical Wholesale had first quarter sales of $5.7 billion, an increase of 5.6% from the year-ago quarter.


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