Key questions and answers from the second quarter fiscal 2009 earnings call conducted by Walgreen Company (WAG: chart) on March 23, 2009.

Andrew Wolf (BB&T Capital): Are you going to remain committed to general merchandise and a robust gift and Christmas program.

Greg Wasson: One of the things we hear loud and clear is that our consumer likes our fun atmosphere. They like seasonal. They like being able to find items quickly and they also like the new items as they are launched. We are not going to deviate from that part of our business. That is where we excel and have excelled for years.

Andrew Wolf (BB&T Capital): On the Rewire initiatives, you're reportedly managing down full-time equivalence from top-down directives at the store level and overtime pay. Is that part of your rewire savings or it is part of the normal course of running a tighter shift at Walgreens?

Wade Miquelon: We're looking everything off of the 2008 base. We are looking for savings in three buckets. The middle bucket is really looking for savings and corporate overheads, field management and at the store level but except that there is some tightening that is factored into it.

Andrew Wolf (BB&T Capital): At the store level could, what is the full-time equivalent reduction going to work out to?

Wade Miquelon: We haven't given any numbers or thoughts on that. Obviously, if we’re going to reduce labor there we are going to have to re-engineer processes. People work very hard at the store; they've a lot to do. Hence making sure that we have simpler promotions, few allotments and all that is going to help but we haven't given any specifics on that to date.

Robert Willoughby (Banc of America): On the receivables build, can you comment on how much may be attributable to the shift into healthcare franchises that you have?

Greg Wasson: There is not really any market shift from the mix in healthcare. The primary reason for this slight receivables change year-on-year is really the Saturday timing. You’ll see that balance up over time. There has also been a little bit of timing on some of the Medicaid payments in the public domain. However, that should work its way out over time.

Robert Willoughby (Banc of America): How is your CapEx split going forward between healthcare and retail?

Greg Wasson: The bulk of it is still going to be on the core. Everything we are doing is to reinforce the core. The bulk of our spending is things like new store openings, remodel and refreshing on our stores, IT infrastructure and distribution infrastructure to support our stores. Hence the overwhelming majority will continue to be on the core.

John Ransom (Raymond James): How much is your SKU rationalization affecting your front-end sales and when will you be through with that process?

Greg Wasson: We are just beginning to roll out some of the categories. We are not seeing any effect on front-end sales. Actually we are looking for an opportunity to grow sales but keep in mind we are through about 50% to 60% of the categories of merchandise we currently have.
We are going to rule out 40 of those by fall. We are looking at the results as we rule them out, and it will begin to pile at full CCR formats in 35 stores in spring.

John Ransom (Raymond James): What percentage of your front-end is Walgreens private label versus third-party and where do you think that could get to in a couple of years?

Wade Miquelon: About 20% of our business is private-label now and is still growing fairly healthily. Obviously, it is seen in countries overseas; Germany, UK, Italy et cetera. Those at the very high-end can approach 40ish percent over time but it depends by category and at the end of the day how do we make our brands play very well with our private label.

John Ransom (Raymond James): How much are the Take Care costs for you this year? When do you think that might have profited assuming it is not profitable now?

Wade Miquelon: It is costing us almost 6 cents a share.
We believe this year is probably the most dilutive year; in other words it will start to creep moving forward although we won't move in the black next year. There will be fewer losses. Of other models, just remember that for this model to become profitable on a stand-alone basis without a script or a front-end sale, our models typically runs 2 to 3 years. Those losses we are incurring is not because our older stores or older clinics are accretive and productive. It is just because of the timing of putting so many clinics in the last year.

Greg Wasson: We’re seeing majority of stores surpassing breakevens but I do not see this as a seasonal business. Strategically, providing access and affordable health care is a huge opportunity for us to leverage our community stores within and that is the reason we are putting a lot of effort into additional services that can be offered to the clinics as well as leveraging Walgreens’ labor model to help improve the operating model within the clinics.

John Ransom (Raymond James): If a big health plan wants to sell their PBM, is that still something strategically that you would say is off the table or it’s something you might look at now?

Greg Wasson: Our key strategy is to broaden and deepen our payor relationships with managed care organizations and PBMs at large. We don't certainly see deviations from that at this point in time, and I can’t comment on the specific opportunity.