Dive Brief:

• Walgreens has embarked on a revamp of stores that includes an enhanced beauty department and health care services, executives told analysts last week during a question-and-answer session on Monday with Lisa Christine Gill, J.P. Morgan Chase senior publishing analyst, at the 36th Annual J.P. Morgan Healthcare Conference.

• The drugstore retailer is rolling out its first pilot stores this year to study results and fine tune the concept before rolling it out more widely, Walgreens Boots Alliance CFO George Fairweather said, according to a transcript of a conference call with analysts from Seeking Alpha. The pilot will launch "early summer, late spring" Walgreens Boots Alliance co-COO Alexander W. Gourlay told Gill.

• Then the company will "probably need another, maybe another period of time, maybe six months, maybe 18 months, to really understand all these components to get the right business model to be able to scale," Gourlay said on Monday. "Some will scale individually, some will scale collectively, but that's the work we're doing next."

Dive Insight:

As Walgreens begins to envision a revamp of its store format, the company is also busy incorporating the 357 Rite Aid stores it bought at the end of December, part of its scaled-back bid to take over the rival. The merger proposed by Walgreens and Rite Aid more than two years ago was subject to long, drawn-out scrutiny by the Federal Trade Commission, which in the end would only agree to the drastically smaller acquisition of stores and distribution centers. 

In the 18 months that Walgreens will be scrutinizing the performance of its new pilot stores, it will also take steps to shutter about 600 stores, Fairweather told analysts last week. "In 2018, you will see us deploy the first pilot stores incorporating all the work we have done to date in a single store format," he said. "We will study the results in depth and fine-tune the format before rolling this new concept out under the ongoing store rejuvenation initiative and within our current capital plan."

Walgreens new Chicago-area optical clinic may be one of those stores, considering that optical services is among the offerings the retailer is looking at for its new stores. "[W]e have done a lot of test and trials, really testing the customer behavior, to be honest about it, how comfortable are they receiving these services either from the pharmacist digitally, or in the store and also some of the services like lab, like optical and of course, the implant with MedExpress," Gourlay told Gill. "And what we're discovering [is] that, almost all of these are getting the right customer reaction. So [the] next phase then is how do you build the partnerships, the operating model and how do you create this space in a drugstore, so that you can actually put it all together?"

An enhanced beauty offering is also part of the plan for all of the company's stores, executives said last week. The beauty category represents about 9% of Walgreens' total retail sales, and the company is working on its own labels as part of a beauty differentiation program, with the products now available at 2,900 stores. "I'm pleased to report that during the first quarter, the beauty differentiation stores performed stronger than in prior quarters," Fairweather said. "Beauty category sales in these stores continued to be markedly better than in other stores, resulting in higher retail gross margin and higher comparable retail sales."