Walgreen Company (WAG)
Q2 2009 Earnings Call Transcript
March 23, 2009 8:30 a.m. ET

Executives

Rick Hans – Divisional VP of Investor Relations and Finance
Gregory Wasson – President and Chief Executive Officer
Wade Miquelon – Senior VP and Chief Financial Officer

Analysts

Andrew Wolf – BB&T Capital Markets
Robert Willoughby – Banc of America
John Ransom – Raymond James
Neil Currie – UBS
Deborah Weinswig – Citigroup
John Heinbockel – Goldman Sachs
Edward Kelly – Credit Suisse
Lisa Gill – JP Morgan

Presentation

Operator

Good day everyone and welcome to the Walgreen Company Second Quarter 2009 Earnings Conference Call. As a reminder, today’s call is being recorded. And now I’d like to turn the conference over to Mr. Rick Hans, Divisional Vice President of Inventor Relations and Finance. Please go ahead sir.

Rick Hans – Divisional Vice President of Investor Relations

Thank you Angel and good morning everyone. Welcome to our Second Quarter Conference Call. Today Greg Wasson, our President and CEO, will discuss the quarter’s highlights and how we are reinforcing our key strategies through changes in our corporate structure; Wade Miquelon, Senior Vice President and Chief Financial Officer, will detail the second quarter financial results before we begin taking your calls. John Spina, our Vice President and Treasurer, also is joining us on the call today. When we get to your questions, please limit yourself to one question and a follow up so that we can give an opportunity to as many investors as possible during our limited time. Today’s call is being simulcast on our Investor Relations website located at investor.walgreens.com. After the call, this presentation will be archived on our website for 12 months.

Certain statements and projections of future results made in this presentation constitute forward-looking information that is based on current market, competitive and regulatory expectations that involve risk and uncertainty. Please see our latest Form 10-K for a discussion of factors as they relate to forward-looking statements. Now I will turn the call over to Greg.

Gregory Wasson – Chief Executive Officer

Thank you Rick, and thank you everyone for listening to our call. We appreciate your continued interest in Walgreens. It is my first call as CEO, which makes it very exciting for me personally, but it is also an exciting time for Walgreens. First, we are moving fast to execute our growth strategy and strengthen our position as America''s most convenient provider of consumer goods and services, as well as pharmacy and health and wellness services. Second, in an economy more challenging than most of us have experienced in our professional lives, Walgreens is well positioned to win. We are responding to the new consumer landscape with new merchandising experts focused on value. And third, we are aggressively reducing costs across the company, and have maintained a healthy balance sheet, which gives us significant flexibility at a time when cash is king.

Now let''s review the second quarter''s financial highlights. Net sales for the quarter were a record $16.5 billion, up 7%. Comparable store sales, adjusted for calendar shifts and last year''s leap day, rose 2.1% in the quarter, while front-end comparable sales decreased 0.2% on an adjusted basis. We are continuing to see evidence of customers changing their buying habits. Front-end comps for discretionary items were down in the second quarter, but that was offset by positive comps for nondiscretionary and other items. Another good sign is that we are holding our own in terms of attracting customers into our stores. Adjusted for last year''s leap day, comparable store traffic was virtually flat in the quarter when compared with a year ago. That means we''re keeping our doors swinging at a good pace even while the retail industry as a whole is seeing more doors permanently close.

Net earnings were $640 million or $0.65 per share diluted compared with $686 million or $0.69 per share diluted a year ago. Remember that last year''s earnings benefited from an extra day due to leap year. Earnings per share this quarter were reduced by a net $0.04 after costs and benefits for our Rewiring for Growth initiative, which I will talk about more later. As we noticed in recent quarters, consumer behavior has changed dramatically in recent months beyond just the kind of products they are purchasing. Job losses and other financial pressures have led to fewer doctor visits, which means fewer prescriptions made, written and filled. Despite that fact, we have filled 164 million prescriptions during the quarter, an increase of 4% over last year''s second quarter. That compares favorably to the industry-wide decline of 1% as reported by IMS, excluding Walgreens. The first half of fiscal 2009 saw us open or acquire 269 drugstores. Even though that is 13 fewer openings than a year ago, the significant impact from our slowdown in new store openings will hit later in fiscals 2010 and 2011. We also opened 117 Take Care Clinics in the first half of the year, including 41 in the second quarter.

During my first 60 days as CEO, one of my key priorities has been to build our management team and its structure in a way that fully supports our three key strategies. Again those strategies are one, to leverage the best community store network in America, two, to enhance the customer experience inside our stores and three, to significantly reduce our costs and boost our productivity. Now let me recap the moves we made to our senior management team in the second quarter to put the right people in charge of the right processes. First Randy Lewis, who is in charge of Logistics and Distribution, is now our Senior Vice President for Supply Chain Management, a pipeline with tremendous opportunity for inventory and cost reduction. Now George Riedl is now leading the ongoing rollout of our new POWER pharmacy program, which I will talk about more a little later. George will also continue to manage pharmaceutical purchasing. Bryan Pugh is now leading our merchandising divisions for all front-end categories in addition to developing new store formats. Finally, Tom Connolly takes over our facilities division. Tom is replacing Bill Shiel, who retired after 38 years with us. Bill had the hard work of turning our division of 7000 community stores into reality, and we certainly thank him for that.

In addition to securing the best store sites in America, Tom will take more of a portfolio management approach towards our slowing organic store growth rate. Historically that growth rate was in the 8% range and even reached 9% in fiscal 2008. Now that we''re stepping down that rate to between 2.5% and 3% by 2011, it is absolutely the right thing to do for three reasons. First, it provides flexibility to invest in our core strategies and improve shareholder value. Second, we will have more time to develop management and focus on the shopper experience. And third, a prudent step in the context of today''s economic conditions. We are seeing consolidation continue in the industry and our financial flexibility allows us to take advantage of these opportunities when they make sense. Last week, we agreed to acquire prescription files from 11 Drug Fair pharmacies in New Jersey, along with 32 other Drug Fair locations we would purchase and operate.

Also in February, we agreed to acquire 12 Rite Aid locations in San Francisco and eastern Idaho. The next piece of our strategy I want to update you on is enhancing our customer experience. One of the ways we are tackling this is through our customer centric retailing project. CCR is about streamlining assortments and reworking promotions. It is not simply about SKU reductions, but about prioritizing categories and items within categories. As an example, we plan to get more space and add items to categories like skincare and cosmetics. These are signature categories that build our brand and create loyal customers. We are rolling out 40 categories with optimized assortments to all of our stores by this fall. These categories account for more than half of our front-end sales. We will do the rollout at the same time we normally do resets in order to avoid disruptions during peak sales periods.

New formats driven by CCR will be piloted in 35 stores by summer. These stores will represent various markets and demographics that we get a good read on results. Besides the new assortment of basic departments, these stores will include a lower store profile and new layouts designed around customer solutions.

After analyzing this initial effort and confirming its success, we plan to fully convert several hundred stores to CCR before Halloween. Then, after holding for the holiday sales period, and making any needed adjustments, we plan to roll out CCR formats at the beginning of calendar 2010. Over the next 18 months, our goal is to touch every store in the chain. That is what I mean when I say we are going to juice our stores. Obviously, this will cost some money and we will pay for it by refocusing some dollars, previously earmarked for new stores to taking care of the older ones. One part of CCR that has moved forward very quickly is our Affordable Essentials program, launched chain-wide in February. This program includes basic staples such as food, paper products, toiletries and other consumables marketed together to move customers up to Walgreens from traditional value retailers. And the third piece of our strategy I want to highlight is cost reductions and productivity gains.