Walgreens looks to adjust approach, invest in the future following Q2 results

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Walgreens looks to adjust approach, invest in the future following Q2 results

04/02/2019
Executives with Walgreens Boots Alliance Tuesday admitted that they weren’t pleased with the company’s second-quarter results — but they came to the table with plans to cut costs and build profitability while cementing itself as a healthcare destination, particularly with regard to its American retail operation. These will come alongside a $1 billion investment over the next three years in operating expense and capital — with roughly $300 million focused on digital capabilities and partnerships.

“While external factors impacted us in the quarter, we clearly need to improve our execution and speed of delivery,” said WBA co-COO and Walgreens president Alex Gourlay on a call with analysts. “We have not moved quickly enough to address the changes in the market and as a result did not deliver the growth required to help mitigate continued reimbursement pressures.”

Executive vice chairman and CEO Stefano Pessina noted that, organizationally, the company would be focused on improving its speed to adapt and address industry headwinds.

With regard to its U.S. retail pharmacy segment, Gourlay noted that the company is focusing on several areas including partnership, digitalization and efforts to revamp its pharmacy and retail approach. Organizationally, Gourlay said he had reorganized his senior leadership team in a way that delineates between development and delivery. Within pharmacy, he said this has create teams to partner with payers while others look to focus on operational effectiveness and outcomes-based reimbursement — an area he said the company made strides in during Q2. The company also is shifting its retail approach.

“In retail we recognize the need to concentrate our efforts where we know we can win,” Gourlay said. “We invested some margin this quarter in categories we know drive footfall and are already starting to see the benefit of this investment in improved revenue and gross profits.”

He said Walgreens also would be focusing resources on such flagship brands as No. 7 and private-label healthcare offerings. “Health and wellness is a significant category with very attractive margins. We will step up the level of innovation and marketing support.”

As part of the shifting retail approach, Gourlay noted that the company was conducting a comprehensive review of its store network to address locations that consistently underperform. This will take place as the company expands its Rite Aid store optimization rates, which he noted had been positive.

“These very favorable retention rates — which allow us to focus volume locally on fewer stores without reducing our geographic coverage — delivered greatly improved returns and have led to a decision to boost our store optimization from 600 stores to approximately 750 stores,” Gourlay said, adding that the company also continues to test its small-format pilot.

Walgreens Boots Alliance also is increasing its cost-cutting target, hoping to achieve $1.5 billion in savings, with WBA global CFO noting that “We want to save to invest to grow.”

Part of that growth for Walgreens and its parent company will come through building up digital capabilities while looking outward to build on existing partnerships — like ones with LabCorp Kroger and Spring — and find new ones. Kehoe said roughly 60% of the $300 million it would be investing will focus explicitly on partnerships.

“Each digital investment and each partnership has to stand on its own merits,” Kehoe said. “We expect an attractive return and long-term significant pools of income.”