Walgreens leaders, facing restive investors, pledge to restore sales, earnings momentum

CHICAGO

Walgreens leaders, facing restive investors, pledge to restore sales, earnings momentum

For the 700 to 800 Walgreens shareholders and investment advisors who braved frigid mid-winter temperatures to hear the company’s plans first-hand, the annual meeting at Chicago’s Navy Pier may have been the bracing tonic they were looking for: a reassurance that Walgreens had a plan to navigate the worst economic upheaval in modern times 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 and interim CEO Alan McNally, president and CEO Greg Wasson and Wade Miquelon, Walgreens’ new senior vice president and chief financial officer, gave frank assessments of the company’s struggle to regain its sales and earnings momentum in the face of its disappointing recent performance and a brutal economic downturn. 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.

Their presentations were a masterful blend of contrition and confidence. McNally, who replaced Jeff Rein as Walgreens chief executive while a national search continues for a permanent successor, set the tone by acknowledging the company’s current challenges and ticking off a slew of initiatives. Those steps, he said, 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.

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.

“A lot has changed for us, too,” he admitted. “Our stock is down by 23%, and down by almost half from our all-time high. Our earnings growth has been significantly reduced. For a company that has had 34 years of record sales and earnings…it’s a very disappointing change.”

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. Said Wasson, “We’re going to leverage the best store network in America. We believe there’s tremendous potential to create more opportunity from those 6,400 stores.” Nevertheless, he said, with a long-term growth target of 3% more new stores annually, “We will still be opening more stores than any other chain in the industry.”

• An intense focus on being, in McNally’s words, “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 the interim CEO.

• 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,” said Wasson. With the overhaul of the baby category, for instance, Walgreens drove up average shopping basket sales in that category by 41%, he said.

• “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 Aug. 31, 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. “We have payers that represent over a billion dollars in prescription sales to this company,” he said.

In line with that initiative, Walgreens also today announced a new “Complete Care and Well-Being” program for employers. 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. It “highlights Walgreens’ move into an expanded role within the broader health care space,” the company noted.

“Evolving past its traditional model, the company is now focusing heavily on health and wellness, including providing care for acute and chronic conditions, primary care, occupational health and infusion services. In addition, Walgreens is offering a 15% savings on all Walgreens brand store products in an effort to further help consumers manage their healthcare costs.”

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, said Wasson, “I’ve never been more excited about the future of this company.”