Walgreens Boots Alliance welcomed fiscal 2019 with a solid Q1 performance. Sales grew 9.9% versus a year ago and 11.4% on a constant currency basis to $33.8 billion. The Retail Pharmacy USA segment sales increased 14.4% in Q1, boosted primarily by the retailer’s acquired Rite Aid stores. Sales for the Retail Pharmacy International segment decreased 3.6%, reflecting ongoing challenges in a difficult market. With Boots struggling in the U.K., Walgreens Boots Alliance is introducing initiatives to improve operational performance and the Boots beauty experience with new brands.
On the subject of Retail Pharmacy USA, a few dominant themes emerged during the earnings call with WBA’s senior leadership:
Cost savings remain a key priority. Global CFO James Kehoe spent much of his portion of the call speaking of the retailer’s “rigorous focus on cost reduction,” highlighting current and future strategies Walgreens is deploying to simplify its operations. Following the completion of a three-phase plan first introduced four years ago, the retailer is embarking on the next stage of its cost management scheme. Walgreens will remain committed to performance optimization within each division while also implementing global programs that focus on smart spending and digital transformation. Notably, the online emphasis will likely be less on eCommerce and more on how Walgreens could enhance its digital capabilities to improve decision-making, patient interfaces, the supply chain, and other aspects of the business. Kehoe said digital will play a vital role in creating a leaner operating model that will make Walgreens more agile. This focus on cost savings likely means the retailer will seek more money from its suppliers in the future.
Convenience is at the core. During his share of the earnings call, Co-COO Alex Gourlay highlighted Walgreens’ dedication to convenience and collaboration. He avoided a narrow definition of convenience, however, by explaining how the retailer seeks to channel “true convenience” in three ways: through the natural proximity most shoppers have to a Walgreens location, with touchpoints outside the store (primarily through digital channels like mobile and voice), and through a properly curated shopping experience. Gourley outlined how the Walgreens shopping experience is based on a “mix of convenience, services, and specialist retail.” With retail healthcare constantly facing disruption, partnerships emerge as an important avenue for Walgreens to innovate quickly and meaningfully.
Partnerships take center stage. Walgreens has never shied away from forming partnerships with specialists to differentiate itself, and collaboration remains a key focus. The retailer is very pleased with its FedEx relationship and believes that its recent move to work with FedEx on next-day Rx delivery is a prime example of how partnerships can evolve to enhance both the in-store shopping experience through greater convenience and the retailer’s services. Partnerships with Birchbox, Sprint, and Kroger are still in the very early stages, but show how the retailer desires to enhance its assortment and services offering.
Beyond those more retail-centric projects, Walgreens is seeking greater innovation in healthcare through its recent partnerships with Verily and Humana. One month after CVS’s third-quarter earnings release, it was hard not to see similarities with concepts that CVS CEO Larry Merlo introduced during his company’s call. While still too early to gauge the performance of its senior-focused primary care clinic pilot with Humana in Kansas City, Gourlay cited customer satisfaction with the format. He also said the pilot provides a template for future expansion into a “hub and spoke idea,” with Walgreens stores and special Humana care clinics supporting each other. Regarding Verily, Walgreens has already started to improve management of chronic conditions (notably diabetes, with the retailer offering the virtual Onduo diabetes management service), and will launch a new medication adherence pilot project, again taking a page from CVS’s integration plans with Aetna.
Walgreens Boots Alliance made progress in its 2019 fiscal first quarter as it aligned itself to its newest strategic initiatives and sought to ensure the financial community that these moves would eventually make the retailer “a strong, healthy, and prosperous business,” to quote CEO Stefano Pessina. With Q1 in the books, Walgreens Boots Alliance will clearly need to strike a delicate balance between innovation and fiscal responsibility.
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Ben Antenore, Analyst