Declining Walgreens Merchandise Sales Offset Drugstore Gain


Walgreens Boots Alliance’s formula for success requires healthy doses of drugstore traffic and general merchandise sales. Put a check mark next to the first part and a big question mark next to the second part.

Under the leadership of CEO Stefano Pessina, Walgreens increased drugstore volumes through deals with health plans and intermediaries known as Pharmacy Benefit Managers. First quarter figures show a 14.1 percent increase in total drug store sales in the United States and a 7.4 percent increase in drugstore revenues in U.S. stores open at least one year.

Impressive numbers, but not dazzling enough to distract investors from falling commodity sales. A 2.8% drop in front-end sales – which cover everything from toothpaste and nail clippers to Twix chocolate bars –triggered a massive sell-off in Walgreens shares, which fell more than 5% on the news. The stock has since gained ground, closing at $ 73.42 yesterday, although far from its 52-week high of $ 88 last February.

Investors are worried about initial sales, as drug store growth alone will not produce sufficient returns over the long term. Drugstore profit margins are under pressure as insurers and government healthcare agencies demand price cuts.

Pessina aims to offset pressure on margins by increasing drugstore volumes and selling more first-line products, which generate higher profit margins. This is a familiar strategy for Walgreens and other large drugstore chains, which have capitalized on their extensive networks of convenient stores to charge higher prices for one-off purchases of various items by customers who collect prescriptions. .

But this age-old business model is getting harder and harder to execute as more people buy drugs through the mail, discount stores proliferate, and online retailers take convenience to a new level. The impact is evident in a series of disappointing sales reports at Walgreens.

Observers expected better from Pessina, an Italian billionaire who took over Deerfield-based Walgreens after merging it in 2014 with its European pharmacy operation, Alliance Boots. His team at UK drugstore chain Boots have built a reputation for savvy forward-thinking merchandising, with an emphasis on cosmetics and other beauty products.

The managers of Boots transplanted to Walgreens have vowed to repeat this success in the United States As in the United Kingdom, the front-end strategy relies on cosmetics. Walgreens has gradually introduced new beauty products over the past few years. Spokesman Michael Polzin said 4,400 of Walgreens’ more than 8,000 stores now carry the No. 7 and Soap & Glory in-house brands, while 2,900 outlets offer a broader beauty portfolio.

In an earnings conference call with analysts on Jan. 4, Walgreens chief financial officer George Fairweather said beauty products now accounted for 9% of initial sales. Fairweather also noted that beauty products, as well as health and wellness offerings, generated six consecutive quarters of same-store sales growth.

But those same six quarters saw overall front-end sales drop, even as Walgreens rolled out new beauty products to more stores. And profit margins decrease with upstream sales. Walgreens reported a gross margin of 24.9% in its U.S. stores for the first quarter of 2018, up from 26.3% a year earlier.

IN THE EYES OF THE SPECTATOR

Polzin attributes lower initial sales to the closure of some e-commerce operations and a decision to focus on higher margin beauty and health products over other merchandise that generates sales volumes higher but lower profit margins. “Beauty category sales in our stores with the enhanced beauty offering,” he says, “are significantly better than in other stores and contribute, as expected, to higher retail gross margin and sales. comparable higher retail prices. “

But Walgreens is not disclosing same-store sales figures for individual product categories like beauty, making it difficult to say how much growth new cosmetics offerings might generate after the initial rollout. It’s possible that they will fuel a sustained front-end turnaround when they reach more stores.

It’s a big if. Walgreens has yet to prove that it can successfully compete in a US cosmetics market dominated by powerful chains like Ulta Beauty. The Bolingbrook-based retailer’s linear mall locations are just as convenient as Walgreens stores – often in the same malls – and it has a wider product line, including # 7.

Weak commodity sales compound other challenges Pessina faces as consolidation reshapes healthcare markets. Walgreens is in the process of absorbing 1,932 Rite Aid stores acquired in a $ 4.4 billion deal. Archirival CVS Health aims to cross the borders of the sector with a plan $ 69 billion acquisition from health insurer Aetna. In the background hides Amazon, which is said to have covets pharmacy sales.

Increasing initial sales will not immunize Walgreens against these trends. But it would increase profit margins, the share price, and the power to control one’s own destiny in an evolving industry.