Voice Of Post

Walgreens closing stores, Walgreens Boots Alliance Inc. plans to close 200 Walgreens drugstores in the U.S., part of a further $500 million in cost cuts planned by the company that was formed by a trans-Atlantic merger at the end of last year.


The cuts include the store closures, a corporate reorganization and a streamlining of information technology by the end of 2017. They will fall heavily on the U.S. side of the business—indicating that the management team, largely made up of faces from European merger partner Alliance Boots, has found plenty to fix on this side of the Atlantic.

“Some parts are better than expected, while others have room for improvement,” Walgreens Boots acting Chief Executive Stefano Pessina on a fiscal second-quarter earnings call Thursday, its first as a combined company.

The deeper cost-cutting comes as some rivals such as Wal-Mart Stores Inc. are boosting spending on stores to make them more productive. Shoppers in recent years have shifted their trips away from big box discounters and toward more convenient chains such as dollar stores and pharmacies.

The changes also include cutting back on promotions at Walgreens stores that cut too deeply into profit margins. The fixes are needed as Walgreens deals with higher costs for generic medicines and reimbursement rates from drug plans that are chipping away at profit.

Overall, Walgreens posted a profit of $2.06 billion, up from $716 million a year earlier, as sales rose to $26.6 billion from $19.6 billion, largely because of the merger.

The company’s forecast for profit in the year that ends this August was largely short of what analysts had expected. Still, its shares were up about 2.6% Thursday morning.Walgreens Boots completed its merger late last year, bringing together the U.S. drugstore chain Walgreens with Alliance Boots, operator of the U.K. chain Boots and a vast drug distribution business. The merger was fraught with controversy, as activist investors and some inside the company strongly pushed to move the company overseas to cut its tax bill.

Ultimately, the companies decided to keep the headquarters in the U.S. Around the same time, the company surprised investors with a warning that drug inflation would hurt its results much worse than they had expected.

The company may not be done with making deals. Mr. Pessina, an Italian-born billionaire who had built up Alliance Boots through a series of acquisitions, strongly believes there are more opportunities in the rapidly changing U.S. health-care industry.

“The complex structure of delivering the medicine to patients will have to be rationalized,” Mr. Pessina said. “As a consequence, it’s easy to believe that we’ll have additional synergies coming from M&A activities.”

He added that Walgreens Boots wants to be “at the forefront of changes.”

The second-quarter report provided a snapshot of the health of the company, which posted sales growth the U.S. and internationally. Sales at U.S. pharmacies opened at least a year rose 6.9% from last year, helped by an active cold and flu season. Prescriptions filled increased 5%, while sales in the front of stores, which includes over-the-counter medicines, snacks and beauty products, rose 2.5%.

Overseas sales rose 2.9% at stores open at least a year.

Another key priority for the company is finding a permanent CEO after Greg Wasson retired following the completion of the merger. Mr. Pessina said a search committee is actively looking for the right candidate, though he said it’s been challenging to find someone who can lead the complex organization.

Walgreens closing stores, Walgreens will shutter about 200 U.S. stores as part of an expanded cost reduction push, but the nation's largest drugstore chain has no plans to shrink in the wake of its combination with European health and beauty retailer Alliance Boots.

The Deerfield, Illinois, company expects to open roughly the same number of stores and will consider more mergers and acquisitions, even as it continues to digest a nearly $16 billion deal that finalized its combination with Alliance Boots, which runs the United Kingdom's largest pharmacy chain.

The store closings that Walgreens announced Thursday amount to only about 2 percent of the 8,232 drugstores the company runs in the United States, Puerto Rico and the U.S. Virgin Islands.

Nevertheless, the closings are the latest example of a strategy shift for a company that was opening about 500 stores a year a decade ago. Walgreens once estimated that it was opening a new store every 17 hours on average.

Major drugstore chains once focused mainly on growing by adding locations. Now, they're trying to squeeze more revenue out of each store by expanding and improving the services they offer and making them more competitive with the grocery chains and big retailers like Wal-Mart that have muscled into the prescription business.

Walgreens also announced the closing of 76 stores last year. The latest round comes as the company expands on a $1 billion, three-year cost reduction plan it announced in August.

The company hasn't finalized the list of stores it will close, but Walgreen Co. President Alex Gourlay told analysts it was looking at locations where the population seemed to be moving away.

"This really is just getting the right stores in the right places," he said.

Walgreens also said it will reorganize its corporate operations and streamline its information technology and other functions. It expects these moves to add $500 million to its cost reduction goal.

Executive Vice Chairman and Acting CEO Stefano Pessina said in a statement from Walgreens that he remains "as optimistic as ever" about the company's future, but they need to work proactively to address challenges like growing pressure on reimbursement for pharmaceuticals and competition.

Drugstore chains have been dealing with shrinking profitability in their main business, prescription drugs, as the gap narrows between the wholesale cost of drugs and the reimbursement pharmacies receive for filling prescriptions.

Late last year, Walgreens completed its purchase of the remaining stake of Alliance Boots that it didn't already own. The company was renamed Walgreens Boots Alliance Inc.

Walgreens initially bought a 45 percent stake in Alliance Boots in 2012 for about $6.7 billion in cash and stock.

Company executives told analysts Thursday that the company may not be done growing. They said more deals are among their top priorities for free cash, along with share buybacks, in terms of boosting shareholder value in the long run. That could mean another acquisition or a joint venture that it works out while Walgreens and Alliance Boots complete their integration.

"If we ... see opportunities, we will be ready," Pessina said during a conference call.

Walgreens also said Thursday that it earned $2.04 billion, or $1.93 per share, in its fiscal second quarter. Earnings, adjusted for one-time gains and costs, were $1.18 per share, which beat analyst expectations.

Walgreens also announced a forecast for full-year earnings in the range of $3.45 to $3.65 per share.

Analysts expect, on average, earnings of $3.62 per share, according to the data firm FactSet.

Pessina replaced Greg Wasson as CEO after the company completed the Alliance Boots combination. Walgreens said Thursday it was still searching for a permanent replacement.

Walgreens shares jumped 4 percent, or $3.54, to $91.22 in afternoon trading, while broader indexes were flat.