In spite of a disappointing third quarter, Walgreen Co. chief executive officer Greg Wasson said the company remains on track with its core strategies — notably its Customer-Centric Retailing (CCR) store optimization initiative.

Walgreens, core strategies, Greg Wasson, Customer-Centric Retailing, CCR, store optimization, Rewiring for Growth, Russell Redman, third quarter, drug store, pharmacy, Duane Reade acquisition, Bill Dreher, Deutsche Bank Securities,

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Wasson: Walgreens' core strategies are on target

June 23rd, 2010
Greg Wasson

DEERFIELD, Ill. – In spite of a disappointing third quarter, Walgreen Co. chief executive officer Greg Wasson said the company remains on track with its core strategies — notably its Customer-Centric Retailing (CCR) store optimization initiative.

The drug store chain on Tuesday reported a decline in fiscal 2010 third-quarter earnings, due in part to special charges and the loss of a key tax benefit, and saw nearly flat same-store sales in the period, despite a 6.1% rise in total revenue.

"Looking ahead, we remain cautious on the economy and confident in our strategies," Wasson said in a statement.

Walgreens said that going forward it expects to get a boost from the CCR push, which when fully implemented is expected to improve sales, reduce working capital and store labor, and improve the overall shopping experience.

The CCR format has now been rolled out to more than 1,200 stores nationwide, a gain of more than 500 stores since the end of the second quarter, according to the retailer, and the time needed to convert a store to the CCR scheme is now 20% less than in earlier conversions.

"Our customers are reacting favorably to the improvements we are introducing through CCR, as well as to our decision to introduce beer and wine, which are now available in nearly 3,600 of our stores," Wasson stated.

In a research note, Deutsche Bank Securities analyst Bill Dreher pointed out that Walgreens is taking a more deliberate pace in rolling out CCR.

"Management lowered its target for CCR remodels by the end of calendar 2010 from a range of 2,500 to 3,000 stores to about 2,000 stores, and they expect to complete the balance (about 3,500 stores) by the end of calendar 2011," Dreher wrote. "On the [third quarter] earnings call, CEO Greg Wasson noted, 'This slowdown is critical to applying important lessons to future conversions.' "

Dreher also reported that Walgreens has reintroduced several hundred products that had been cut as part of CCR's SKU reduction, has added new SKUs to existing categories and is aiming to have beer and wine in more than 5,000 stores by the end of this calendar year.

"Management also revealed that CCR format stores continue to perform better than the
control group [stores] in most product categories," he wrote.

Meanwhile, Walgreens said in its third-quarter report that the integration of Duane Reade is on track, and "the company is pleased with the especially strong performance by its new and renovated stores."

Walgreens, which closed the nearly $1.1 billion deal in early April, stated that it expects to generate $120 million to $130 million in synergies from the acquisition over the next three years.

Dreher wrote in his research note that Wasson is enthusiastic about the opportunities that the Duane Reade acquisition will open up for Walgreens in such areas as urban retailing, customer loyalty, private brand and beauty. As an example, Wasson in the earnings call cited the retailer's plan to offer a selection of Duane Reade's Delish private-brand consumables chainwide in August, the analyst reported.

In Walgreens' third-quarter report, Wasson stated that the company also is seeing an expansion of opportunities for its new pharmacy, health and wellness solutions. On that front, the company noted that it filled a record 198 million prescriptions in the quarter, better positioning the chain to help patients, employers and other payers rein in health care costs "beyond the cost of prescriptions."

"With the passage of health care reform, we have the assets to provide holistic solutions to employers' health care needs," Wasson commented. "For consumers, we are planning another comprehensive flu shot program this fall, as one example of our expanded vaccination and immunization program."

And in the area of cost reduction, Walgreens continues to focus on reducing overhead through its Rewiring for Growth initiative. The company said the effort is on target for net pretax savings of $500 million this fiscal year and $1 billion in annual savings beginning in fiscal 2011.

The retailer, too, continues to grow its store base. In the third quarter, Walgreens opened 94 drug stores and acquired 258 Duane Reade drug stores and nine other drug stores, for a net gain of 342 stores after relocations and closings — versus a net gain of 179 in the year-ago period. As of May 31, Walgreens operated 7,522 drug stores nationwide, including 117 hospital on-site pharmacies.

Walgreens added that it expects organic store growth of 4.5% to 5% in fiscal 2010 and between 2.5% and 3% annually starting in 2011.