How Effective Has Walgreens’ Cost Transformation Program Been?

In August 2014, Walgreens Boots Alliance (NASDAQ:WBA) announced its Cost Transformation Program which was aimed at reducing costs, restructuring stores and improving efficiency. The three year program was expected to bring in $1 billion in cost savings. In April 2015, the expected cost benefits were further increased by $500 million to $1.5 billion by the end of fiscal 2017 (year ends August). The cost saving measures were primarily aimed at improving the operations of the Retail Pharmacy USA division and involved closing stores in the U.S., reorganizing operations, improving information and technology services and enhancing operating efficiency. Below we look at how effective the program has been in achieving its goals.

Since the announcement of the plan, Walgreens’ revenue has increased from $19.55 billion in the quarter ended November 2014 to $28.50 billion in the quarter ended November 2016. While this has primarily been due to an increase in the number of prescriptions filled at the company’s retail outlets, the company’s investments in setting up retail clinics within its existing stores has also augmented the revenue growth. In the same period, the company’s selling, general and administrative (SG&A) expenses have increased at a slower rate than revenues and that has resulted in the decrease in the company’s SG&A expenses as a percentage of revenues. Going forward, we expect this trend to continue, which should help the company expand its margins.

In the same period, Walgreens reduced its store count from 8,330 (November end 2014) to 8,135 (November end 2016). The company not only closed 195 stores but also restructured many more, which has resulted in improved operational efficiency. The successful implementation of the program is all the more commendable since the company has undergone restructuring due to its acquisition of Boots Alliance and its agreement with Amerisource Bergen, both of which have had a noteworthy impact on the company’s expenses. Buoyed by the successful implementation of the Cost Transformation Program, the company predicts a $300 million savings in its operating expenses for fiscal 2017. For the ongoing fiscal year, the company now expects its operating expenses to be in the range of $1.3 billion to $1.5 billion, against the earlier anticipated range of $1.6 billion to $1.8 billion. ^[1]

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

1. Walgreens Q4 Earnings Transcript, Seeking Alpha, October 20 2016 [↩]