DEERFIELD, Ill. — Walgreens cited a challenging economy and low front-end comparable store sales for its weaker than expected third quarter results.
The company has therefore initiated a three-point plan to boost front-end performance as the company shifts its Balance Rewards customer-acquisition focus into second gear with a greater emphasis on redemption and rewards.
"While we are seeing several positive indicators in our Daily Living business, such as increases in customer delight, basket size and gross margins, our front-end sales and traffic are still not up to expectations," Greg Wasson, Walgreens president and CEO, told analysts early Tuesday morning. To that end, Walgreens is implementing a three-point plan — making adjustments to pricing and promotions; maximizing the value of the company's 75-million strong Balance Reward loyalty program; and enhancing store segmentation to better meet the needs and preferences of local communities.
While Walgreens outlined its strategy to improve the front-end, Wall Street reacted to lower-than-projected revenue expectations. Shares of Walgreens fell more than $3 to $44.75 per share in early morning trading. Walgreens reported earnings of $624 million, or 65 cents per share. Excluding items, Walgreens earned 85 cents per share, falling short of analyst expectations of 91 cents per share, according to Thomson Reuters I/B/E/S.
To help boost results going forward, Walgreens will be tweaking its promotional strategy to include more circulars. "We're applying what we're learning from our Balance Rewards program to ensure we have the items that are most relevant to our customers in both assortment and price to meet their daily living needs," Wasson said. Walgreens will also be highlighting the dollar value of points earned in both stores and circulars to help improve loyalty card utilization and customizing promotions to better serve communities on the local level.
Front-end comparable store sales increased 0.4% in the third quarter, customer traffic in comparable stores decreased 3.9% and basket size increased 4.4%, while total sales in comparable stores increased 1.4%.
On the other side of the bench, "we're beginning to hit on all cylinders," Wasson said. "[Pharmacy comp sales were up] 7.1%, compared to 5.7% in the second quarter; we gained 80 basis points in marketshare, from 18.4% to 19.2%; 90-day prescriptions continue to grow, increasing 19% year-over-year while IMS [Health] continued to report slowing growth of mail," Wasson said. "All of this comes in an environment where physician visits are down 2.7% year-over-year in May, according to JP Morgan's monthly tracker, and this follows year-over-year declines February through April," he added.
Looking forward, Walgreens' pharmacy operations will benefit from the long-term contracts with predictable rates with many of the major commercial payors in the market. Walgreens is also expected to capitalize on a growing Medicare Part D business, especially as several states expand their Medicare rolls beginning in 2014. "Our increase in Medicare Part D volume has exceeded the market every month since January," Wasson said. "And with 10,000 people turning 65 every day and signing up for coverage, we have tremendous opportunity to continue growing our volume over time," he said. "With more and more folks coming into the Medicaid population that are conducive to 90-day supplies of chronic medications, there are opportunities for us to work with states [in ways] that we haven't in the past [to help] drive adherence."
Healthcare reform is also expected to be a pos