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.
Neil Currie (UBS): You appointed Bryan Pugh as Head of Merchandising at just the front-end. He also has a role in format. Could you give more detail as to what his role is and what format you maybe considering and whether you might venture into any particularly new formats?
Greg Wasson: I originally brought him in to lead new formats and then I’d recently given him front-end merchandising. However, as far as new formats, I think initially to be making sure that we launched the CCR initiative that we have across the chain in a very prudent and efficient manner. We will be testing in 35 stores that new format which is lower profile, low profiles as well as optimized merchandising.
We will also begin to explore new formats based on our customer research that we are getting from Kim Feil, our new CMO and begin to pilot in select stores. There is tremendous opportunity now that we’ve brought all the resources together under Bryan to really begin to be more efficient, to learn and study what we pilot. We are looking at high-volume urban locations and how we can leverage new formats to help accelerate our growth in urban areas and so forth. Hence I think Bryan is going to really help us there.
Neil Currie (UBS): Would you consider formats without a pharmacy?
Greg Wasson: I don''t think anything is off the table but certainly be in a pharmacy and that being our franchise, it really will be something that we have to consider. Hence I don''t see that being studied right now.
Wade Miquelon: We do have a few stores today that are very successful without a pharmacy but those are in very specialized locations, maybe tourist areas. However, broad scale, it really doesn''t make any sense for us right now.
Deborah Weinswig (Citi): You previously talked about a comprehensive loyalty program which would include the Walgreens Prescription Savings Club but also potentially more of typical rewards card like CVS has its Extra Care. Can you talk about your current thoughts there?
Greg Wasson: We brought Kim Feil in as our new Chief Marketing Officer and as you know she''s got a strong IRI background, customer insight and customer research. We believe that to improve and accelerate customer loyalty within our franchise is an opportunity. Kim’s first objective was to study and learn who our customer is and more about our customer and how to target those customers but with that we certainly think our loyalty program is of value. She is working through how we would consider going to market and the proper loyalty program for Walgreens.
Deborah Weinswig (Citi): On the real estate side, what are your comments with regards to construction cost, site availability and your ability to renegotiate leases?
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