In an effort to step up cost reductions, Walgreens is set to close 200 of its stores. As reported by multiple sources to include KTLA Channel 5 News, the company’s cost restructuring program has been extended through fiscal year-ended 2017 and will reach roughly $500 million.
As part of Walgreen Co and Alliance Boots GmbH’s first earnings announcement since the end of last year, Walgreens Boots Alliance, Inc. confirmed the company has plans that include the closing of 200 stores.
Cost Reduction Initiative
Early, the company announced a cost reduction initiative valued at $1 billion. However, after a more exhaustive analysis of the situation was analyzed, plans changed whereby even a greater number of stores than originally planned would close. The majority of store locations are in the United States and part of the retail pharmacy division. The ultimate goal is to achieve even greater cost savings.
Although the primary area of focus is on approximately 200 store closings, Walgreens also has plans to streamline its information technology, reorganize both field and corporate operations, and a number of other things.
By closing the additional stores, a representative for Walgreens said it will allow the company to save an additional $500 million. With this, the total cost savings anticipated is $1.5 billion, still targeting fiscal year-end 2017.
Within the first half of fiscal 2015, Walgreens opened 71 new drugstores. Of these were 25 relocations coupled with 46 closed locations. According to the latest numbers at the end of February, 8,232 drugstores across all 50 states, as well as Puerto Rico, the US Virgin Islands, and the District of Columbia were being operated.
In a statement from Stefano Pessina, executive vice chairman and acting CEO, this quarter represented a good start for Walgreens. He added that he, along with other company executives, are highly optimistic regarding the long-term success of the company. However, there is also an understanding that a lot of work is needed to overcome challenges like competition and reimbursement pressure.
Pessina added that as part of design upgrade, Walgreens plans to reinvest in the stores within the division. The principal retail pharmacy brands that make up the US retail pharmacy division include Walgreens but also Duane Reade. Together the brands achieved $21 billion in second quarter sales, which was a healthy increase of 7.4 percent compared to the same time last year.
In looking at its database, Morgan Stanley Research saw that 2.8 percent of leases with Walgreens are scheduled to expire between 2016 and 2020. While not confirmed, the research firm feels strongly that these stores are probably the ones at greatest risk for closing.
Other information gathered by Morgan Stanley include the fact that Walgreens was a tenant at 401 properties, which are burdened with CMBS 2.0 loans that have an allocated balance of $1.5 billion stretched out over 105 deals. Of those deals, leases for 11 will expire during the 2016 through 2020 time period.