Walgreen Company Earnings Call Insights: Store Labor, Customer Recovery Process

On Friday, Walgreen Company (NYSE:WAG) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Store Labor

Andrew Wolf – BB&T Capital Markets: Wade, on your (exposition) on the net number for the impact from Express Scripts. I think you have talked about, there is a lot of labor taken on other costs but (on same rate) mainly labor. I think you have talked about as that business can come back that could be leveraged at a rate where the variable costs for the labor doesn’t have to come back at the same rates. Can you just give us an update on your thinking in that regard?

Gregory D. Wasson – President and CEO: Yes. I mean, that’s absolutely true. I mean, most of the costs we took on will not come back. What we will do is we will do things where we see higher volumes of Express. We will put the proper labor back, and adjustments like that for the most part I will say that we have very strong leverage on it and most of the costs will not come back.

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Andrew Wolf – BB&T Capital Markets: So it’s just going to be – I mean, as we are trying to model things sort of mechanically would it be that we – if we came up to an estimate of how much cost was taken out, would it be fair to say maybe half of that would come back once you open that one?

Wade D. Miquelon – CFO: With respect to store labor we took for 9% to 10% loss whatever in Pharmacy sales. We took out I think 2% or so of our labor. So you have a ratio there four, five to one. So we will make the right interventions to make sure that we have the right service levels and take care of our patients. But really a lot of the other efforts that we did to be more focused with respect to projects corporately, efforts we made across (calls) and other things, I mean, those are sustainable interventions.

Andrew Wolf – BB&T Capital Markets: The other question I’d like to ask, before moving on to the next is, if you do any adjusted EPS and add back the Express Scripts impact you get about a 5% growth this quarter, 7% for the year. I wonder, if you could expand upon are there any kind of opportunity costs, let’s say, loss run in sales for example, that are not necessarily quantified but that either can expand upon or perhaps you can quantify?

Wade D. Miquelon – CFO: I think your math is probably fairly close. I think I guess one thing is obviously, there have been some challenges in the overall economy, but I think as we go forward, I guess what I would say from this point forward I see that we have good tailwinds. I think we have the Express situation behind us and so whatever we win back, we’ll win back, but that will be a tailwind. We’ve got as Greg said, we’re very well situated with many of the other players and we feel that we’re going to be well-versed to gain share. We’ve got the loyalty program, which has been invested in heavily upfront and now it’s often running very successfully and we have the Alliance Boots closed and the initiation of the work behind us as well and so now we move forward then into our forecasts for growth and accretion. So, I think you probably have a pretty good framework there and I think moving forward, I would just put that on top of it.

Gregory D. Wasson – President and CEO: Andy, I would add a lot of the work that we’ve done over the past year, such as our effort to really accelerate private brand, the completion of CCR last spring, the enhanced products we’re putting with fresh food, immediate meal consumption so forth, all that we feel very good about being delivered strong tailwinds for us.

Andrew Wolf – BB&T Capital Markets: The way you calculate the $0.06 and the $0.21, that’s a Pharmacy only or is that trying to include front-end?

Wade D. Miquelon – CFO: That includes the front-end as well.

Andrew Wolf – BB&T Capital Markets: Then just lastly, it’s a technical question on the LIFO charge was a way higher than I think I expected and probably everyone else and inventories were down a lot for the year. This happens to be something due to layers you got into or more inflationary or is it just sort of a much bigger swing than I would have thought, if you could just give us some explanation of that?

Gregory D. Wasson – President and CEO: Yeah, I mean it’s pretty simple as what I said, even though there is a lot of different moving parts that happened in the calculations the reality is the brand inflation in the fourth quarter and particularly in July and August, I believe we had last year around 2.5% in the quarter, it was about 5%, so almost doubling. So when you consider the size of our brands and brands in inventory, those kind of movements have a huge impact. That doesn’t mean it will sustain back and forth. I think part of the plan when adjusted especially the FIFO is, is that it’s a much clear picture of how our operations and our business and our profitability comes in than the LIFO, so it’s an additional perspective that will allow people to see our business both on maybe more of a normalized perspective or additional perspective but also how others do it.

Andrew Wolf – BB&T Capital Markets: So that’s branded pharma or the front-end?

Gregory D. Wasson – President and CEO: That is branded pharma. Not the generic piece, but the branded pharma piece in particular, the inflation was again basically double of what we saw year prior and it really kicked up in July and August with three or four brands in particular.

Customer Recovery Process

David Magee – Suntrust Robinson Humphrey: Greg, I wanted to ask you, you mentioned the three buckets as far as you look at the customer recovery process. Could you comment I guess based on your past experience, maybe the relative size of those buckets are thought to be?

Gregory D. Wasson – President and CEO: Dave it’s kind of hard to say. I think certainly bucket one, typically is the easiest and most quickly to come back and that’s what I said on the call, we’re seeing that. It really comes down to three things; convenience, the relationship and service that these folks were forced away from and we think we went in all three of those. I think we were extremely convenient. We think that we’ve had folks in that first bucket especially we’ve had relationships over the years and we give great service. I think we’ll find out more and more as we get into this. There is a lot of things that come into that. As we’ve seen clients sending communication to their members, they come back quickly and that’s the reason I said as more plans notify their members, I think we’ll see probably bucket two become even easier for us. So, it’s hard to dimensionalize. But I’d try to put it in those three bucket just so you can also understand our spend, because I think there is also some concerns or thoughts out there that we are going to get into a price war for these (stations). We are certainly going to spend our marketing dollars strategically across those three buckets and get the ROI that we need or we expect to get from that.

David Magee – Suntrust Robinson Humphrey: Then just secondly, can you talk a little bit about what you’re seeing with reimbursements in the U.K. for Boots and what the prospects are there over the next 12 months?

Gregory D. Wasson – President and CEO: Yeah, I think there is some noise along the lines of the reimbursement cuts that the U.K. or England put into place last week. I think the main thing is that was absolutely budgeted and anticipated by Alliance Boots. They’ve been doing this for years and obviously, that’s an annual adjustment, so it was expected. So, it won’t impact their budget or their performance and therefore, also won’t impact our accretion numbers as well.