On the heels of Q3, Walgreens outlines shift in front-end strategy and pharmacy tailwinds looking forward

DEERFIELD, Ill. — Walgreens on Tuesday initiated a three-point plan to boost front-end performance as the company shifts its Balance Rewards customer-acquisition focus into second gear with a greater emphasis on redemption and rewards. 

"While we are seeing several positive indicators in our Daily Living business, such as increases in customer delight, basket size and gross margins, our front-end sales and traffic are still not up to expectations," Greg Wasson, Walgreens president and CEO, told analysts early Tuesday morning. To that end, Walgreens is implementing a three-point plan — making adjustments to pricing and promotions; maximizing the value of the company's 75-million strong Balance Reward loyalty program; and enhancing store segmentation to better meet the needs and preferences of local communities. 

While Walgreens outlined its strategy to improve the front-end, Wall Street reacted to lower-than-projected revenue expectations. Shares of Walgreens fell more than $3 to $44.75 per share in early morning trading. Walgreens reported earnings of $624 million, or 65 cents per share. Excluding items, Walgreens earned 85 cents per share, falling short of analyst expectations of 91 cents per share, according to Thomson Reuters I/B/E/S. 

To help boost results going forward, Walgreens will be tweaking its promotional strategy to include more circulars. "We're applying what we're learning from our Balance Rewards program to ensure we have the items that are most relevant to our customers in both assortment and price to meet their daily living needs," Wasson said. Walgreens will also be highlighting the dollar value of points earned in both stores and circulars to help improve loyalty card utilization and customizing promotions to better serve communities on the local level. 

Front-end comparable store sales increased 0.4% in the third quarter, customer traffic in comparable stores decreased 3.9% and basket size increased 4.4%, while total sales in comparable stores increased 1.4%.

On the other side of the bench, "we're beginning to hit on all cylinders," Wasson said. "[Pharmacy comp sales were up] 7.1%, compared to 5.7% in the second quarter; we gained 80 basis points in marketshare, from 18.4% to 19.2%; 90-day prescriptions continue to grow, increasing 19% year-over-year while IMS [Health] continued to report slowing growth of mail," Wasson said. "All of this comes in an environment where physician visits are down 2.7% year-over-year in May, according to JP Morgan's monthly tracker, and this follows year-over-year declines February through April," he added.

Looking forward, Walgreens' pharmacy operations will benefit from the long-term contracts with predictable rates with many of the major commercial payors in the market. Walgreens is also expected to capitalize on a growing Medicare Part D business, especially as several states expand their Medicare rolls beginning in 2014. "Our increase in Medicare Part D volume has exceeded the market every month since January," Wasson said. "And with 10,000 people turning 65 every day and signing up for coverage, we have tremendous opportunity to continue growing our volume over time," he said. "With more and more folks coming into the Medicaid population that are conducive to 90-day supplies of chronic medications, there are opportunities for us to work with states [in ways] that we haven't in the past [to help] drive adherence."

Healthcare reform is also expected to be a positive driver behind pharmacy. "Walgreens, with our 8,000 locations and 70,000 healthcare professionals, is increasingly well-positioned to meet the growing demand for convenient, affordable non-emergency care," Wasson said. 

During the quarter, Walgreens' Take Care Health division expanded its scope of services to include diagnosis, treatment and management for hypertension, diabetes, high cholesterol and asthma. "With our leading role in three [Accountable Care Organizations] and our strategy to service many others, patients providers and payors are recognizing the value of community pharmacy as part of the solution to meet the triple aim of improving the patient experience, driving better health outcomes and lowering overall healthcare costs."

Walgreens posted a net earnings of $624 million for the third quarter ended May 31, a 16.2% increase. Third quarter sales increased 3.2% compared with the prior-year quarter to $18.3 billion, while sales for the first nine months decreased 0.5% to $54.3 billion. 

Prescription sales, which accounted for 63.1% of sales in the quarter, increased 3.4%, while prescription sales in comparable stores increased 2%. The company filled 209 million prescriptions in the quarter, an increase of 8.7% over last year’s third quarter. Prescriptions filled in comparable stores increased 7.1% in the quarter.

“This quarter we continued to see a strengthening in our pharmacy performance as we maintained strong margins and increased our retail pharmacy market share from 18.4% to 19.2% year over year,” Wasson stated. “This, in combination with our focus on cost control, and the contribution from Alliance Boots and related synergies, resulted in adjusted earnings per diluted share growth of 18.1% [to 85 cents] in the quarter.”

Walgreens joint synergy program with its strategic partner, Alliance Boots, is on track to deliver combined first-year synergies of between $125 million and $150 million, compared with the company’s previous target of between $100 million and $150 million. Alliance Boots contributed 10 cents per diluted share to Walgreens third-quarter adjusted results, including a negative impact of 2 cents per diluted share due to reconciliation of International Financial Reporting Standards with GAAP. Alliance Boots is anticipated to contribute 8 cents per diluted share to fourth-quarter adjusted results, including a negative impact of 1 cent per diluted share from weakening in the British pound between February and May.

Notables over the course of the quarter included Walgreens' launch of No7 Men skin care products through both Walgreens and Duane Reade locations and the opening of flagship stores in Boston, New York, San Francisco and Washington. Walgreens now has 10 flagship locations across the U.S.


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Comments

Walgreens' Take Care Health

Walgreens' Take Care Health division has been at the forefront of fight against such life-threatening diseases. It is hearttening to hear that the organization has broadened its range of services. Now with diagnosis, treatment and management for hypertension, diabetes, high cholesterol and asthma on its regular list, we can really get maximum benefits out of the whole service.

The decrease in customer

The decrease in customer traffic may be attributed to 3 things among others. 1. Those not wanting to hassle with a "balance reward card" to get the sale prices have gone elsewhere. 2. Dollar Stores are now selling cigarettes which would decrease customer count (this would also account for the slight increase in basket size since a lot of the cigarette customers only come in to buy cigarettes and nothing else). I believe this was alluded to in the conference call. 3. The resorting to having "skeleton crews" for both the front end and the pharmacy has resulted in customers who are looking elsewhere for convenience and customer service. Cutting labor costs in a big way helped earnings/margins but impacted sales.