Differentiated offerings key element to WBA growth strategy
With more than half of all prescription drugs today being dispensed to a baby boomer in the U.S., which contributes significantly to an overall U.S. healthcare expenditure equivalent to 18% of the country’s GDP, it has never been more important for pharmacies to deliver on the promise of differentiated offerings.
Rather than chaffe under the pharmacy reimbursement pressures that market dynamic generates, Stefano Pessina, executive vice chairman and CEO Walgreens Boots Alliance, and his team on Wednesday morning pointed to the number of levers Walgreens has to help mitigate escalating healthcare costs and make the retail pharmacy chain a key partner to providers and payers. “Fundamentally we see ourselves as being in very attractive markets,” he said. “The pressures on pharmacy are just elements of the overall pressures on the healthcare system. … It is a sign that everyone recognizes the need to control the inevitable growth in demand [for healthcare services].”
Thanks in part to the differentiated offerings already in play, Walgreens earlier Wednesday morning posted sales of $33 billion for its second quarter ended Feb. 28, an increase of 12.1% from the year-ago quarter, and an increase of 9.4% on a constant currency basis.
Walgreens has both the experience and track record to help manage those healthcare costs.
“The attractiveness of medication-based treatments to keep people leading productive lives in the community continues to increase as the cost of medication remains materially lower than total cost of healthcare,” Pessina said.
Pessina outlined a five-point strategy to capitalize on that growth opportunity:
- Leverage partnerships or acquisitions to consolidate volumes and use these volume efficiencies to buy “best in class” services that are significantly better than the competition;
- Control costs and optimize financial synergies;
- Differentiate services through a combination of exclusive services and innovative own brand offerings;
- Build a portfolio of complementary businesses across a broad geography; and
- Reinvest in the business to drive both organic and external growth.
These efforts have contributed to a commanding prescription market share of 21.4% for the company. That market share is increased 200 basis points over the past three years.
Walgreens is applying similar efforts against developing its front-end business, where gross margins have improved more than 300 base points in the most recent quarter vs. the comparable quarter three years ago.
“This progress has been made through a combination of solid retail management in focusing promotions and applying rigorous financial discipline,” Alex Gourlay, co-COO Walgreens Boots Alliance, said. “Through changes in merchandising and product mix we have furthered our strategy of differentiation and increased penetration of own brands while significantly improving margins. This has been achieved in competitive markets by driving improvements in our health and beauty offerings.”
For example, the Walgreens differentiated beauty offering has been rolled out to approximately 2,900 locations to date, Gourlay reported. “Since we completed the roll out, beauty sales in the beauty differentiation stores have outperformed our non-beauty differentiation stores,” he said. “In the quarter this accounted for a retail margin differential of around 2 percentage points.”
To help deliver a differentiated health offering, Walgreens plans to bring to bear its optical hearing care and lab testing services as part of a new pilot store initiative. “The pilot stores will also provide a platform for the existing initiatives we have already introduced such as our strategic partnership with FedEx,” Gourlay said. “The development of the new store formats and the iterative evolution as we learn more from their performance in the market also provides us with the opportunity to develop a wider range of services and a different value proposition.”
The recent completion of the Rite Aid store acquisitions will help accelerate these front-end growth initiatives, Gourlay added.
Walgreens also has invested $500 million in improving its front-of-store systems and anticipates investing an additional $500 million in the next three years, Gourlay told investors. “We are starting to get good data from our stores and we are making progress toward what we need,” he said. “We are now running the Balance Rewards program as a data and consumer insight tool as much as a marketing program as it was orginally designed.”
That loyalty program today boasts 88.6 million active users, Gourlay said.
Rite Aid finalizes transfer of stores to Walgreens Boots Alliance
Rite Aid on Tuesday finalized the transfer of 1,932 stores and related assets to Walgreens Boots Alliance in return for $4.2 billion. The transfer of the three distribution centers and related inventory is expected to begin after Sept. 1, 2018.
The majority of the closing conditions have been satisfied, and the transfers of Rite Aid distribution centers and related assets remain subject to minimal customary closing conditions applicable only to the distribution centers being transferred at such distribution center closing.
As part of its quarterly earnings report, Walgreens on Wednesday noted that the newly-transferred Rite Aid stores will be a significant tailwind behind pharmacy results. “We expect to continue to grow, in part through the recent acquisition of stores from Rite Aid, and today we are raising our fiscal 2018 guidance,” Stefano Pessina, executive vice chairman and CEO of the Deerfield, Ill.-based retailer, said.
Walgreens raised the lower and upper ends of its guidance for fiscal 2018 and now anticipates adjusted diluted net earnings per share of $5.85 to $6.05.
Rite Aid also announced that its board of directors has terminated the tax benefits preservation plan that it adopted on Jan. 3, 2018. As a result of the Plan, Rite Aid protected approximately $2.2 billion of Rite Aid’s net operating losses. The Plan was originally scheduled to expire on Jan. 3, 2019.
Walgreens’ U.S.-based pharmacy ops drive Q2 growth
Walgreens Boots Alliance on Wednesday posted sales of $33 billion for its second quarter ended Feb. 28, an increase of 12.1% from the year-ago quarter, and an increase of 9.4% on a constant currency basis.
“Our growth strategy of increasing and consolidating volume, differentiating ourselves through value and quality of service, and controlling costs is bearing fruit across our businesses,” Stefano Pessina, executive vice chairman and CEO of the Deerfield, Ill.-based retailer, said. “This is reflected in another good set of financial results in which we delivered the highest sales growth in eight quarters, as well as strong cash generation and record U.S. pharmacy market share. We expect to continue to grow, in part through the recent acquisition of stores from Rite Aid, and today we are raising our fiscal 2018 guidance.”
Shares of Walgreens Boots Alliance were up $2.54 to $68.50 in pre-market trading as the Chicagoland retailer beat analyst estimates. According to reports, Wall Street had expected the pharmacy operator to report earnings per share of $1.55, up 14%, with revenue increases of 9% to $32 billion.
In addition to beating revenue expectations by $1 billion, Walgreens Boots Alliance earned $1.73 a share.
Retail Pharmacy USA had second quarter sales of $24.5 billion, an increase of 12.2% over the year-ago quarter. Sales in comparable stores increased 2.4%.
Pharmacy sales, which accounted for 70.3% of the division’s sales in the quarter, increased 18.7% compared with the year-ago quarter, primarily due to higher prescription volume including central specialty and mail following the formation of AllianceRx Walgreens Prime and from the acquisition of Rite Aid stores.
Comparable pharmacy sales increased 5.1%, primarily due to higher volume. The division filled 269.2 million prescriptions (including immunizations) adjusted to 30-day equivalents in the quarter, an increase of 9.1% over the year-ago quarter. Prescriptions filled in comparable stores increased 4% compared with the same quarter a year ago, primarily due to volume growth from previously announced strategic pharmacy partnerships and Medicare Part D growth.
Retail sales decreased 0.7% in the second quarter compared with the year-ago period. Comparable retail sales were down 2.7% in the quarter.
As of the end of the second quarter the company had acquired 1,542 Rite Aid stores under the previously announced amended and restated asset purchase agreement. Since the end of the quarter the company completed the acquisition of all 1,932 stores. The transition of three distribution centers and related inventory is expected to begin during fiscal 2019.
The company continues to expect to complete integration of the acquired stores and related assets by the end of fiscal 2020, as previously announced.
As part of a program to optimize locations, the company continues to expect to close approximately 600 stores and related assets over an 18-month period. Cost savings from the program are still anticipated to be approximately $300 million per year and are still expected to be fully delivered by the end of fiscal 2020.
As Pessina mentioned, Walgreens raised the lower and upper ends of its guidance for fiscal 2018 and now anticipates adjusted diluted net earnings per share of $5.85 to $6.05. The company now expects to obtain a cash tax benefit from the U.S. tax law changes in excess of $350 million for fiscal year 2018, compared with the previous estimate, announced in January, of more than $200 million.
WBA’s Retail Pharmacy International division posted second quarter sales of $3.3 billion, an increase of 7% from the year-ago quarter due to currency translation. Sales decreased 2.6% on a constant currency basis. Meanwhile, the company’s Pharmaceutical Wholesale division realized second quarter sales of $5.8 billion, an increase of 14.4% from the year-ago quarter, mainly due to currency translation.