Walgreens tightens store development as earnings growth falters amid downturn

DEERFIELD, Ill. Walgreen Co. acknowledged today it will clamp down even harder on its store expansion plans—until recently the pacesetter for all of pharmacy retailing—in the face of a dismal retail climate and a breakdown in profit momentum.

Walgreens reported a rare reversal in its profit growth in the first quarter of fiscal 2009, with net earnings dropping 10.4 percent from the same period last year to $408 million. The decline came despite a 6.6 percent rise in sales for the period ending Nov. 30, to a record $14.9 billion, and a meager gain of 1.7 percent in comp-store sales vs. first-quarter 2008.

Prescription sales climbed 6.2 percent and accounted for 66 percent of sales in the quarter, while prescription sales in comparable stores rose 2.6 percent, Walgreens reported this morning.

The decline in net income is almost unprecedented in Walgreens’ history over the past 34 years of record-setting growth, and it underscored the sobering reality even the nation’s strongest retailers are grappling with as consumers cut back on spending amid the worst economic downturn in decades. In response, the chain revealed today it would further reduce its organic store openings to a rate between 4.0 and 4.5 percent in 2010 and between 2.5 and 3.0 percent in 2011.

“This is a further reduction from plans announced last July to slow organic store openings to 5 percent by 2011,” Walgreens announced. “The company will continue to open new stores in strategic markets, on the best corners, and which offer the greatest rates of return.”

By throttling back on its once-torrid store construction schedule, Walgreens said it will cut its capital expenditures through 2011 by another $500 million, give or take, beyond the $500 million capital expenditure savings announced last July. “We believe that further slowing of organic store growth is a prudent step in the context of current economic conditions,” said president and CEO, Greg Wasson.

“Furthermore, by freeing up human and financial capital, substantial upside exists to drive greater value creation by enhancing the best community-based store network in America.

“This includes refreshing and remodeling existing stores, more efficient assortment within stores, prescription file buys and continued expansion of retail and worksite clinics.”

Wasson also pointed out that Walgreens continues to outperform most of its peers in benchmarks like number of prescriptions filled, which rose 3.7 percent over last year’s first quarter. That compares to an industry-wide decline of 0.5 percent [excluding Walgreens] during the same period, according to IMS Health and Walgreens figures.

“We continue to post solid sales results and achieve strong cost control in this difficult retail environment,” said Wasson. “Customer traffic strengthened through the quarter and we’re making substantial progress on our growth strategies to get more from our core operations and enhance the customer experience.”

As it searches for a successor to former chairman and chief executive officer Jeff Rein, Walgreens will also continue to pursue its strategy of trying to lock down the best retail locations in cities and towns throughout the United States, the company’s president indicated. “The store we opened in New York’s Times Square in November is a great example,” said Wasson. “Early results are excellent and already place the store among our top performers.”

Nevertheless, the weakness of the U.S. economy clearly took a toll on the industry’s premier drug chain. The number of prescriptions filled in comparable stores was “virtually flat,” Walgreens acknowledged, although prescriptions were up 1.5 percent when adjusted for more patients filling 90-day prescriptions versus 30-day. Same-store front-end sales were also flat in the quarter.