Walgreens Boots Alliance’s third quarter improved upon a soft Q2 even amid continued front-store and international segment declines. Total WBA sales grew 0.7% versus a year ago and 2.9% on a constant currency basis to $34.6 billion, but operating income and net earnings declined, sliding 24.7% and 23.6%, respectively. Sales in the Retail Pharmacy USA segment grew 2.3%, driven primarily by pharmacy brand inflation and script growth. The Retail Pharmacy International segment remained a weak point, falling 1.6% as Boots continues to struggle.
Compared with its Q2 earnings call, WBA’s senior leadership team sounded more confident in the retailer’s direction, focusing on the progress it has made in its turnaround plan. Here are some few key takeaways:
Front-store declines continue. Walgreens’ retail business continues to struggle. In Q3, total retail front-store sales decreased 2.9%, driven primarily by the retailer’s store optimization program. Improving on a first-half decline of 3.5%, comparable retail sales fell only 1.1%, suggesting that Walgreens’ declines may be slowing. History may not repeat itself, but it does echo: CFO James Kehoe attributed much of the comps decline to his retailer’s decision to slowly pull tobacco from its stores. To anyone familiar with the history of CVS’s front store, this all sounds very familiar.
To turn around the front store and trigger growth, co-COO Alex Gourlay spoke to progress made on several initiatives. Walgreens’ private label assortment received a special mention, with WBA beauty brand No7 performing well and Gourlay sharing plans to revamp parts of his retailer’s own brand portfolio. Beyond some plans for store investment, Walgreens’ senior leadership team also announced that it will be reviewing its real estate footprint and closing underperforming stores. As Walgreens pushes forward with its “neighborhood health destination” formats, not every store will be worth updating, and this plan, along with the retailer’s Transformational Cost Management Program, show how the retailer is “trimming the fat.”
Cost control leads to smaller U.K. store base. Alongside initiatives to change the retail experience, Walgreens Boots Alliance is committed to finding efficiency and cutting costs in its large retail empire. The retailer is on track to deliver $1.5 billion in annual cost savings by 2022 and, after introducing smart benchmarking initiatives, it has begun implementing programs to reduce pharmacy cost and headcount overlap.
With the Retail Pharmacy International segment is still a pain point for Walgreens Boots Alliance, the retailer’s finance teams have set their sights on Boots U.K. On top of a previously announced 20% reduction in headcount at headquarters, WBA is also closing over 200 stores — approximately 8% of the Boots store base.
Digital growth provides some optimism. Considering some of the retailer’s larger challenges, WBA’s digitization efforts emerged as an unlikely, but positive, subject. Gourlay cited some impressive growth numbers: The Walgreens app has been downloaded 57.3 million times, up 10.5% from the same period last year; approximately 26% of Walgreens’ retail scripts were initiated through digital channels in the quarter, up 18.4% from the same period last year; and the total number of active Balance Rewards members increased to 90.2 million.
Although WBA’s senior leadership sounded more positive during the earnings call, challenges abound for the retailer: Familiar headwinds associated with reimbursement pressure and pricing of generics continue to batter the drug channel, while Walgreens’ front-store investment plan still seems to lack focus. WBA is looking ahead, prepared to make difficult decisions to rebalance its business for the future.
To learn more about how to better partner with the Walgreens front store, join us July 24 for our Drug Channel Workshop in Morristown, N.J.
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Ben Antenore, Analyst