Walgreens will shutter about 200 U.S. stores as part of an expanded cost reduction push, but the nation’s largest drugstore chain has no plans to shrink in the wake of its combination with European health and beauty retailer Alliance Boots.
The Deerfield, Illinois, company expects to open roughly the same number of stores and will consider more mergers and acquisitions, even as it continues to digest a nearly $16 billion deal that finalized its combination with Alliance Boots, which runs the United Kingdom’s largest pharmacy chain.
The store closings that Walgreens announced Thursday amount to only about 2 per cent of the 8,232 drugstores the company runs in the United States, Puerto Rico and the U.S. Virgin Islands.
Nevertheless, the closings are the latest example of a strategy shift for a company that was opening about 500 stores a year a decade ago. Walgreens once estimated that it was opening a new store every 17 hours on average.
Major drugstore chains once focused mainly on growing by adding locations. Now, they’re trying to squeeze more revenue out of each store by expanding and improving the services they offer and making them more competitive with the grocery chains and big retailers like Wal-Mart that have muscled into the prescription business.
Walgreens also announced the closing of 76 stores last year. The latest round comes as the company expands on a $1 billion, three-year cost reduction plan it announced in August.
The company hasn’t finalized the list of stores it will close, but Walgreen Co. President Alex Gourlay told analysts it was looking at locations where the population seemed to be moving away.
“This really is just getting the right stores in the right places,” he said.
Walgreens also said it will reorganize its corporate operations and streamline its information technology and other functions. It expects these moves to add $500 million to its cost reduction goal.
Executive Vice Chairman and Acting CEO Stefano Pessina said in a statement from Walgreens that he remains “as optimistic as ever” about the company’s future, but they need to work proactively to address challenges like growing pressure on reimbursement for pharmaceuticals and competition.
Drugstore chains have been dealing with shrinking profitability in their main business, prescription drugs, as the gap narrows between the wholesale cost of drugs and the reimbursement pharmacies receive for filling prescriptions.
Late last year, Walgreens completed its purchase of the remaining stake of Alliance Boots that it didn’t already own. The company was renamed Walgreens Boots Alliance Inc.
Walgreens initially bought a 45 per cent stake in Alliance Boots in 2012 for about $6.7 billion in cash and stock.
Company executives told analysts Thursday that the company may not be done growing. They said more deals are among their top priorities for free cash, along with share buybacks, in terms of boosting shareholder value in the long run. That could mean another acquisition or a joint venture that it works out while Walgreens and Alliance Boots complete their integration.
“If we … see opportunities, we will be ready,” Pessina said during a conference call.
Walgreens also said Thursday that it earned $2.04 billion, or $1.93 per share, in its fiscal second quarter. Earnings, adjusted for one-time gains and costs, were $1.18 per share, which beat analyst expectations.
Walgreens also announced a forecast for full-year earnings in the range of $3.45 to $3.65 per share.
Analysts expect, on average, earnings of $3.62 per share, according to the data firm FactSet.
Pessina replaced Greg Wasson as CEO after the company completed the Alliance Boots combination. Walgreens said Thursday it was still searching for a permanent replacement.
Walgreens shares jumped 4 per cent, or $3.54, to $91.22 in afternoon trading, while broader indexes were flat.