Walgreens centers strategy on cost cuts

Dive Brief:

Walgreens Boots Alliance on Wednesday reported that first quarter sales rose 1.6% to $34.3 billion, as retail sales fell 2.2% year over year.
Comparable retail sales fell 0.5% in the quarter, mostly due to continued de-emphasis of tobacco, according to a company press release. Excluding tobacco and e-cigarettes, front-of-store comps rose about 0.8%, "reflecting solid growth in the core health and wellness and beauty categories," the company said.
Operating income in the quarter fell 27.6% to $1 billion; adjusted operating income fell 15.6% to $1.5 billion, missing Wells Fargo estimates for $1.7 billion, according to a client note emailed to Retail Dive. Net earnings attributable to Walgreens Boots Alliance fell 24.8% to $845 million.

Dive Insight:

Walgreens is centering a recovery on cost savings, which the company said on Wednesday is on track to yield some $1.8 billion by 2022.

But, despite some initiatives including a purchasing tie-up with Kroger and a deal to take FedEx packages in stores, the company is projecting flat earnings growth. Walgreens isn't getting much help from its healthcare operations, with its U.S. retail pharmacy division seeing retail prescription market share on a 30-day adjusted basis decrease some 55 basis points in the quarter to 20.9%. And while the company touted its core health, wellness and beauty strength, that also under-performed compared to the wider beauty market, according to GlobalData Retail, which noted that Walgreen's 0.8% sales increase pales next to the the 4.1% growth in sales in the beauty and wellness market during the period.

The problem lies in its retail operations, namely, the outdated condition of its stores, according to GlobalData Retail Managing Director Neil Saunders.

"The central issue for Walgreens is that it is doing comparatively little to make itself and its stores more relevant to consumers," he warned in a client note Wednesday. "In terms of design, configuration and offer, most of its shops across the US look largely the same as they did 10 or 15 years ago. This lack of evolution is delivering a mediocre performance."

Wells Fargo analysts led by Peter Costa noted that there was no mention in its release regarding rumors that the company may be taken private. "The quarter continued to reveal weaker than expected operating trends, though management maintaining guidance was a modest positive offset," the analysts also wrote.