Walgreens Boots Alliance, Inc. WBA – formed through the combination of pharmacy giant Walgreen Co. and Alliance Boots GmbH – has announced its plans to shut down 200 of its drugstores in the U.S. Incidentally, this news came close on the heels of the mixed second-quarter fiscal 2015 results (its first as a combined entity) that were reported yesterday.
Subsequent to the release of the twin news, shares of this largest retail pharmacy chain in the U.S. and Europe jumped 5.6% to reach $92.62 on Apr 9.
The company had earlier adopted a cost saving program with a target to save $1 billion which was raised to a target of $1.5 billion yesterday during its earnings release. According to Walgreens Boots, this latest store closure declaration is part of the company’s upgraded cost reduction strategy.
In Mar 2014, Walgreens Boots’ management had approved a plan to close underperforming stores with an aim to optimize and focus resources to enhance shareholder value. The aforementioned store closure news at Walgreens Boots is in sync with this strategy.
In fact, as estimated, no harm will be done if the company shuts down its underperforming stores. As of Feb 28, 2015, Walgreens Boots has closed 68 locations, one of which downed shutters in the first half of fiscal 2015. Remarkably, the company recognized no charges related to this closure in the fiscal second quarter results.
Statistically, the store shut-down that Walgreens Boots announced yesterday (according to CNN Money) amount to only about 2.4 percent of the 8,232 drugstores the company runs currently in the U.S., Puerto Rico and the U.S. Virgin Islands.
It is worth mentioning that these closures reflect a strategy shift for Walgreens Boots given that the legacy Walgreens was setting up about 500 stores each year a decade ago.
However, the company has not yet finalized the list of stores it will close. Also, no time frame has been set for the completion of the store closure procedure.
On an encouraging note, management expects to open roughly the same number of stores, going forward, but strictly in locations with higher profit potential.
Conventionally, the trend among major drugstore chains was to open more stores in varied locations. However, lately they have discovered that it is wiser to instead extract more sales from individual profitable stores by expanding capacity and improving in-store services. This way, retail drugstore corporations are now trying to stay abreast with bigger competitors in the retail space. Big retailers such as Wal-Mart Stores Inc. (WMT) have gained a lot lately through their healthy prescription businesses.
We believe Walgreens Boots is gradually treading the same path adopted by other drugstore chains. It should soon be able to extract the fruits of these cost reduction strategies and move closer to its fiscal 2017 goal of achieving cost savings. We believe, such efforts will eventually bolster investor confidence in the stock.
Zacks Rank
Walgreens Boots currently has a Zacks Rank #3 (Hold). Some better-ranked medical products stocks are LeMaitre Vascular, Inc. LMAT, SurModics, Inc. SRDX and Capricor Therapeutics, Inc. CAPR. While LeMaitre and SurModics sport a Zacks Rank #1 (Strong Buy), Capricor Therapeutics holds a Zacks Rank #2 (Buy).
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