Walgreen Co. is looking ahead to a year of further growth as it builds on the progress of its key business strategies, namely the enhancement of its drug store base, according to president and chief executive officer Greg Wasson.

Walgreens, Greg Wasson, fiscal 2010, Rewiring for Growth, Customer-Centric Retailing, CCR, store format, drug store, pharmacy, Duane Reade, flu shot, William Blair & Co., Mark Miller, Bill Dreher, Deutsche Bank Securities, Russell Redman

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Walgreens makes strides with core strategies

September 29th, 2010

DEERFIELD, Ill. – Walgreen Co. is looking ahead to a year of further growth as it builds on the progress of its key business strategies, namely the enhancement of its drug store base, according to president and chief executive officer Greg Wasson.

The pharmacy chain this week posted record sales for its 2010 fiscal year, with revenue up 6.4% year over year to $67.4 billion and net earnings per share up 5% to $2.12 — in part fueled by a strong fourth quarter, which lifted the company's stock price 11.4% the day that results were reported.

The fiscal 2010 per-share earnings were in line with analyst estimates in a year when the company faced cost pressures from acquisitions, its Rewiring for Growth restructuring plan and its Customer-Centric Retailing (CCR) store optimization initiative.

"Fiscal 2010 was highlighted by accelerating execution on our core strategies and an ability to leverage our financial flexibility to capture growth opportunities, including our acquisition of Duane Reade," Wasson said in a statement. "We remain confident in our ability to drive earnings growth, increase our return on invested capital and generate strong cash flow.

"Our use of cash has been, and will continue to be, guided by a capital policy that commits us to maintaining a strong balance sheet and financial flexibility; reinvesting in core strategies and related strategic activities; and returning surplus cash to shareholders in the form of dividends and share repurchases," he noted.

During fiscal 2010, Walgreens converted or opened more than 1,500 stores to the CCR format and now has more than 1,800 stores sporting the new format. Analysts report that the retailer expects over 2,000 stores to have the format by the end of the calendar year, with an eventual goal of rolling out CCR to between 5,500 and 6,000 of its 7,500-plus stores.

Also, beer and wine has been added to more than 3,500 stores and now is available in roughly 4,200 stores. More than 5,000 stores are expected to carry beer and wine by the end of the calendar year.

"After a slow start and reflective of a test-and-learn process, the consumer-centric retailing initiative now appears to be driving modestly stronger sales, higher margins, working capital gains and improved customer satisfaction," William Blair & Co. analyst Mark Miller wrote in a research note on Walgreens' fiscal 2010 fourth quarter and full-year results.

Walgreens said it opened 291 net new drug stores in fiscal 2010, a year that also marked the largest pharmacy acquisition in the company's history: the 258-store purchase of Duane Reade, a move that gave the retailer a leading position in the metropolitan New York market.

Plans call for new store growth of between 2.5% and 3.0% in fiscal 2011. At the end of fiscal 2010, Walgreens had 7,561 stores in 50 states, the District of Columbia and Puerto Rico, compared with 6,997 a year earlier.

Strong gains also are being made on the pharmacy front, Walgreens noted. The chain reported that it filled a record 778 million prescriptions in fiscal 2010, an increase of 7.5%. And as of the fiscal year-end on Aug. 31, the company increased its retail pharmacy market share 60 basis points from a year ago to 19.5%.

Walgreens added that it administered more than 7 million seasonal and H1N1 flu shots last year and, for the coming flu season, has expanded its network of certified immunizers and other health care professionals to more than 26,000, up from 16,000 at the start of last year's flu season.

Still, Walgreens and its competitors may be hard-pressed in the near term as the flu season gets under way, given the tough comparisons to last year's robust flu-related business from public fears about the H1N1 virus.

"The next few months will be challenging for Walgreens since the company will be cycling last year's spike in Rx demand driven by the H1N1 flu," Deutsche Bank Securities analyst Bill Dreher said in a research report on Walgreens latest financial results. "Sales comparisons should get easier as the traditional peak of the cold and flu season (January/February) arrives. Walgreens is well-positioned this cold and flu season in part due to the significant investments to ramp up immunization capacity and customer accessibility this year."

On the restructuring front, Walgreens said it reached its Rewiring for Growth cost reduction goals in fiscal 2010 and is on target for $1 billion in annual savings in fiscal 2011.

"Walgreens indicated that it achieved a net benefit of $615 million in fiscal 2010 from its Rewiring for Growth initiative, above the company’s initial $500 million target," Miller said in his report. "However, management stated that some Rewire costs were pushed out into early fiscal 2011, while certain Rewire savings arrived ahead of schedule. For fiscal 2011, Walgreens now expects to achieve $400 million in incremental net savings, putting the company on target with its $1 billion in net savings goal."