Walgreens to cut new-store construction

DEERFIELD, Ill. In a major shift from its long-term strategy as the drug store industry’s most aggressive proponent of new-store construction and internally driven growth, Walgreens revealed today it would scale back significantly on its organic store construction and expansion program.

The scale-back in new-store development will begin to take effect late this summer, at the beginning of Walgreens’ new fiscal year Sept. 1.

The announcement came as something of a surprise to Walgreen-watchers, but was not wholly unexpected. Amid a bleak economic outlook, a drug store marketplace reaching saturation levels in many regions, and its own need to bolster profitability, Walgreens’ decision to ease back on its growth throttle was a welcome one for Wall Street analysts and investors, who today drove the company’s stock price ahead by more than 4 percent on high trading volume.

For much of the past two decades, Walgreens has been on a torrid expansion campaign, marked by the industry’s most aggressive store-construction program and a bold and seemingly unstoppable march into every major market in the continental U.S. Along the way, the company has opened hundreds of new stores each year, smashing through the 6,000-store barrier last fall in New Orleans and repeatedly reaffirming long-stated plans to operate 7,000 stores in all 50 states by 2010.

That growth strategy will culminate with the opening of more than 500 net new organic stores in the current fiscal year, which ends Aug. 31. However, fiscal 2008 may prove, in retrospect, to mark the peak of new-store development for the industry’s most growth-driven drug chain.

Walgreens will continue to grow in fiscal 2009, said chairman and chief executive officer Jeff Rein. But the pace of new-store construction will slow from this year’s nearly 9 percent increase in net new organic stores. Although the company said it will still add some 495 new stores in fiscal 2009 beginning in September, thanks to new store openings already in the pipeline, the pace of organic-store development will slacken considerably after that.

“Walgreens intends to reduce its expansion…to a goal of about 6 percent in fiscal 2010 and approximately 5 percent annual increases beginning in fiscal 2011,” the company reported today. “Previously, the company had planned a long-term store growth rate of 8 percent.”

The cutback, said chairman and chief executive officer Jeff Rein, “allows us to improve both return on invested capital and overall shareholder value,” while giving Walgreens “the flexibility to invest in our core strategies.”

The more modest growth plan will still yield a net gain of some 425 newly built stores in 2010, Walgreens revealed, followed by roughly 365 new stores the following year.

Walgreens said it expects to cut capital expenditures by about $500 million over the next three fiscal years compared to the company’s previously announced plans. Even with the cutbacks, the company said it “remains on track to reach its goal of operating more than 7,000 stores by 2010 and continue expanding its store base throughout the U.S.”

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