WBA executives bullish on new year's promise following strong 2017

DEERFIELD, Ill. — Walgreens Boots Alliance on Wednesday exceeded analyst expectations with results that came in slighlty north of the company's year-end projections thanks, in part, to the company's commitment to a fluid go-to-market strategy that is constantly evaluating customer behavior.



"We have a lot of pilots and tests in the marketplace," Alex Gourlay, co-COO Walgreens Boots Alliance, shared with analysts Wednesday morning. "[We're] really testing, at this stage, consumer behavior. Can we get consumers and patients to see us differently and use these services that we're now providing." Some examples cited by Gourlay included WBA's partnership with LabCorp, which makes lab testing accessible at retail. Gourlay also mentioned the company's interest in parlaying its heritage in the optical business in the U.K., and leveraging its global partnerships there toward the creation of a U.S. solution.



Similarly, hearing care, Gourlay added. "Hearing care, again, we have a successful business in the U.K. We understand the model very well and we're bringing that here to the U.S. in a test-and-trial [pilot] as well. That's happening just after Christmas," he said. "Using our physical, convenient locations, using our healthcare brand, working in partnerships to gain access to our customers [are] all part of what we're doing right now in terms of developing new business models in the healthcare space."



Of course, the margins associated with retail pharmacy are under increasing pressure from declining reimbursement rates, and one way to combat that is to galvanize the front-end of the store where profit margins are both larger and more elastic. Analysts have suggested it's a business model imported from the U.K. and WGA's Boots operations. "If you look at the pharmacy [market] in the U.K., it has been under pressure for decades," added Stefano Pessina, executive vice chairman and CEO, Walgreens Boots Alliance. "The reason why we have developed the stores overseas - increasing margin across the front of the store [and] creating a completely new [retail] model - it's because over time we had to cope with the margin in the pharmacy, which was initially very good, but shrunk over time," he said. "In the U.S., the margin of the pharmacy [business] is still decent. It's under pressure, yes, but we have so many levers to compensate that we are not particularly worried. But in the meantime, we are trying to create a new model that will allow us to keep the profit of the company overall at the level we believe is satisfactory."



The front-end of the future will be predicated on convenience, Gourlay added. "The model we're developing is to really understand how customers will shop today and in the future from a convenience location," he said. "Job No. 1 is to simplify the offer so they can find the product really quickly at good value. [It's] a combination of convenience, quality of products, uniqueness of products and also price. We believe we can do that really well in healthcare and OTC [and] we're doing it better in beauty." In terms of other categories, Goulray pointed to the successful relaunch of its Nice own brand. "The packaging is fantastic and it's doing really well early on," he said.



"What's really important to the customer of the future is the app, and how we can join forces of a convenient store with a mega-app," Gourlay said. "We have a mature platform there that more and more we are connecting to the store," he said. "Since we've combined all of our e-commerce assets under Walgreens.com, we have seen huge volume of growth, in particular in health and beauty."



In addition to its continual monitoring of the front-end strategy, Walgreens will be onboarding its acquisition of 1,932 Rite Aid stores over the next three years at an estimated cost of approximately $750 million. The first few Rite Aid stores have been acquired in the past week, Walgreens reported. Ownership of the remaining stores is expected to be transferred in phases, with the goal being to complete the store transfers in spring 2018.



Walgreens Boots Alliance noted it would be rationalizing some 600 stores, mostly Rite Aid locations within one mile of an existing Walgreens operation.



In addition to the $750 million in transfer costs, the company plans to invest approximately $500 million of capital on store conversions and related activities.



In response to what best practices Walgreens Boots Alliance will take from its acquired Rite Aid stores, Gourlay identified both the high caliber of personnel tied to those stores, as well as the discipline those store teams have in executing a lower-cost and lower-volume front-end model. "We started our journey with the 1,500 lower-volume stores in the summer and look forward to really understanding how we can apply their thinking to our model going forward," he said. "[And] we're getting a lot of great people. We're getting the operational teams who have run that business and understand the drug store channel. I'm sure within that we will find talent that will improve the great talent we have in Walgreens [stores]."



The Rite Aid deal extends the Walgreens brand into additional communities and affords greater access to more customers.





Walgreens Boots Alliance posted adjusted fiscal 2017 fourth quarter net earnings of $1.4 billion, representing an increase of 18.8 compared with the same quarter a year ago. Adjusted diluted net earnings per share for the quarter were $1.31, up 22.4% on an actual and constant currency basis, compared with the same quarter a year ago.



Sales in the fourth quarter were $30.1 billion, an increase of 5.3% from the year-ago quarter, and an increase of 6.4% on a constant currency basis.



For the fiscal year 2017, which ended 31 August 2017, sales increased 0.7% to $118.2 billion compared with the prior year. On a constant currency basis, sales increased 3.3%. Adjusted net earnings attributable to Walgreens Boots Alliance in fiscal 2017 increased 9.9% to $5.5 billion, up 11.6% on a constant currency basis, compared with the prior year. Adjusted diluted net earnings per share in the fiscal year increased 11.1% to $5.10, up 12.9% on a constant currency basis, compared with the prior year.



WBA's Retail Pharmacy USA division posted fourth quarter sales of $22.3 billion, an increase of 7.5% over the year-ago quarter. Sales in comparable stores increased 3.1% compared with the same quarter a year ago.



Pharmacy sales, which accounted for 72.1% of the division’s sales in the quarter, increased 12.6% 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 5.6%, primarily due to higher volume. Reimbursement pressure and generics had a negative impact on comparable pharmacy sales growth, which was partially offset by brand inflation. The division filled 250.2 million prescriptions (including immunizations) adjusted to 30-day equivalents in the quarter, an increase of 9% over the year-ago quarter.



Prescriptions filled in comparable stores increased 8.7% compared with the same quarter a year ago, primarily due to Medicare Part D growth and volume growth from previously announced strategic pharmacy pa