Walgreens US growth stalls
With the inclusion of Boots Alliance’s figures now annualised, total sales at Walgreens US grew by just 2.4 per cent – the slowest pace in over a year.
This more subdued uplift was not helped by the strength of the dollar over the period, which translated a 3.4 per cent growth in international revenue on a constant currency basis, into a 2.3 per cent decline in actual terms.
Given Walgreens’ exposure to the UK via its Boots operation, near-term revenue and earnings from international are likely to come under further pressure thanks to the lower value of pound. This will more than offset any sales gains made in local currency terms.
That said, Walgreens can likely look forward to another fillip to revenue from the Rite Aid acquisition which is expected to close in the second half of the calendar year once statutory antitrust waiting periods have expired. Walgreens has used the pause in proceedings to complete a US$6 billion public offering to fund a portion of the cash consideration for Rite Aid, as well as to map out its integration plans. This deal will be value accretive, mostly thanks to the forecast $1 billion in synergy savings and to the productivity improvements Walgreens can bring to Rite Aid’s rather lacklustre stores.
Walgreens US has enacted a turnaround at Rite Aid, boosted by the group’s progress in reinventing its own front of store retail offer. Although comparable sales at the retail operation, which excludes pharmacy, increased by a meagre 0.1 per cent during the quarter, this was an improvement on the 0.3per cent decline posted last quarter.
This performance is likely to strengthen further as Walgreens rolls out an enhanced beauty offering – including showcasing its own brands like No 7 cosmetics, providing shoppers with more of an in-store experience, and focusing on premium gifting. This is already in progress with trials in Phoenix having delivered some strong uplifts in terms of basket size and frequency of purchase. Some 1800 more stores will be updated with the new offering by the calendar year end, bringing the total number of stores with the new offer to 2000.
Walgreens’ focus on the US as a source of growth is not surprising as the drugstore sector as a whole performs under its potential in terms of retail. As the growth of beauty specialists like Ulta shows, the neglect of front of store has traditionally been a lost opportunity. However, it is one that Walgreens is now capitalising on.
Looking further ahead, Walgreens can be expected to look to further drive its front-of-store enhancements with improvements to its eCommerce operations. The combination of the two, especially given Walgreens convenient locations, will likely be a winning proposition over the medium term.
- Neil Saunders is CEO of Conlumino.