Walgreens 2012 Annual Report Download - page 21

Restructuring Charges
In 2008, we announced a series of strategic initiatives, approved by the Board of
Directors, to enhance shareholder value. One of these initiatives was a program
known as “Rewiring for Growth,” which was designed to reduce cost and improve
productivity through strategic sourcing of indirect spend, reducing corporate
overhead and work throughout our stores, rationalization of inventory categories,
and realignment of pharmacy operations. These initiatives were completed in the
fourth quarter of fiscal 2011.
We recorded $42 million of pre-tax charges in selling, general and administrative
expenses in fiscal 2011 associated with our Rewiring for Growth program and
$66 million in fiscal 2010. In addition, as a part of our restructuring efforts,
we sold an incremental amount of inventory below traditional retail prices.
The dilutive effect of these sales on gross profit for fiscal years 2011 and 2010
were $3 million and $21 million, respectively.
We realized total savings related to Rewiring for Growth of approximately $1.1 billion
in fiscal 2011 compared to our base year of fiscal 2008. Selling, general and
administrative expenses realized total savings of $953 million, while cost of sales
benefited by approximately $122 million. The savings were primarily the result of
reduced store labor and personnel and expense reductions.
Additionally, as a part of our Customer Centric Retailing (CCR) initiative, we have
modified our store format to enhance category layouts and adjacencies, shelf
heights and sight lines, and brand and private brand assortments, all of which
were designed to positively impact the shopper experience. This initiative was
completed in the first quarter of fiscal 2012. In total, we converted 5,843 stores
and opened 559 new stores with the CCR format. In the first quarter of fiscal
2012, we incurred $33 million in total program costs, of which $15 million was
included in selling, general and administrative expenses and $18 million in capital
costs. In fiscal 2011, we incurred $144 million in total program costs, of which
$84 million was included in selling, general and administrative expenses and
$60 million in capital costs. In fiscal 2010, we incurred $71 million in total program
costs, of which $45 million was included in selling, general and administrative
expenses and $26 million in capital costs.
Operating Statistics
Percentage Increases/
(Decreases)
Fiscal Year 2012 2011 2010
Net Sales (0.8) 7.1 6.4
Net Earnings (21.6) 29.8 4.2
Comparable Drugstore Sales (3.6) 3.3 1.6
Prescription Sales (3.1) 6.3 6.3
Comparable Drugstore Prescription Sales (6.1) 3.3 2.3
Front-End Sales 3.6 8.5 6.8
Comparable Drugstore Front-End Sales 0.6 3.3 0.5
Gross Profit (0.7) 8.0 7.7
Selling, General and Administrative Expenses 1.9 6.7 8.0
Percent to Net Sales
Fiscal Year 2012 2011 2010
Gross Margin 28.4 28.4 28.1
Selling, General and Administrative Expenses 23.6 23.0 23.0
Other Statistics
Fiscal Year 2012 2011 2010
Prescription Sales as a % of Net Sales 63.2 64.7 65.2
Third Party Sales as a % of Total Prescription Sales 95.6 95.6 95.3
Number of Prescriptions (in millions) 664 718 695
Comparable Prescription % Increase/(Decrease) (8.4) 1.5 3.3
30-Day Equivalent Prescriptions (in millions)* 784 819 778
Comparable 30-Day Equivalent Prescription
% Increase/(Decrease)* (5.1) 3.7 4.5
Total Number of Locations 8,385 8,210 8,046
* Includes the adjustment to convert prescriptions greater than 84 days to the equivalent
of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions
include approximately three times the amount of product days supplied compared to a
normal prescription.
the issued and outstanding share capital of Alliance Boots GmbH, in exchange
for $4.025 billion in cash and 83,392,670 shares of Walgreens common stock
(Step 1). Alliance Boots is the largest retail pharmacy, health and daily living
destination in Europe with over 3,330 retail locations. Its pharmaceutical wholesaling
and distribution businesses, together with associates and joint ventures, operate
over 370 distribution centers supplying more than 170,000 pharmacies, doctors,
health centers and hospitals. We account for our 45% investment in Alliance Boots
using the equity method of accounting on a one-month lag basis. Because the
closing of this investment occurred within one month of the Company’s fiscal
year end, the results of operations of Alliance Boots GmbH are not reflected in the
Company’s reported net earnings for the fiscal quarter or year ended August 31,
2012. Our 45% proportionate interest in the profit of Alliance Boots GmbH for the
three-month period ended October 31, 2012, will be reflected in the Company’s
reported net earnings for the fiscal quarter ended November 30, 2012.
The Purchase and Option Agreement also provides, among other things and subject
to the satisfaction or waiver of specified conditions, that we will have the right, but
not the obligation, to acquire the remaining 55% interest in Alliance Boots GmbH
in exchange for £3.133 billion in cash, payable in British pounds sterling, and
144,333,468 shares of Walgreens common stock, subject to certain specified
adjustments (second step transaction). If Walgreens exercises the call option,
in certain limited circumstances, Walgreens may be required to make the entire
second step transaction payment in cash. The call option is exercisable by us,
in our sole discretion, at any time during the period beginning February 2, 2015 and
ending August 2, 2015. In addition, in certain specified cases, if Walgreens does not
exercise the call option, or Walgreens has exercised the call option but the second
step transaction does not close, Walgreens may be required to return to the sellers
an approximately 3% interest in Alliance Boots GmbH in exchange for a nominal
amount. Walgreens initial investment and the call option excludes the Alliance Boots
minority interest in Galenica Ltd. (Galenica). The Alliance Boots investment in
Galenica continues to be legally owned by Alliance Boots for the benefit of Alliance
Boots shareholders other than Walgreens. Additional information regarding our
investment in Alliance Boots GmbH is available in our Current Reports on Form 8-K
filed on June 19, 2012 and August 6, 2012 (as amended by the Form 8-K/A filed on
September 10, 2012). The amendment to our August 6, 2012 Form 8-K filed on
September 10, 2012, includes as exhibits thereto Alliance Boots audited consolidated
financial statements for the years ended March 31, 2012, 2011 and 2010 (prepared
in accordance with International Financial Reporting Standards as issued by the
International Accounting Standards Board) and unaudited pro forma consolidated
financial information related to our 45% investment in Alliance Boots GmbH.
Other strategic acquisitions in fiscal 2012 included certain assets of BioScrip,
Inc.’s (BioScrip) community specialty pharmacies, and centralized specialty and
mail services pharmacy businesses, which advance community pharmacy and
bring additional specialty pharmacy products and services closer to patients. The
Company also grew its infusion business in select markets through the acquisition
of Crescent Pharmacy Holdings, LLC (Crescent). On September 17, 2012, the
Company completed its acquisition of USA Drug, which includes 144 drugstore
locations operating under the USA Drug, Super D Drug, May’s Drug, Med-X and
Drug Warehouse names. Significant acquisitions in prior years include the purchase of
drugstore.com, inc. in fiscal 2011, which enhanced our online presence, and the
acquisition of Duane Reade Holdings, Inc., and Duane Reade Shareholders, LLC
(Duane Reade) in fiscal 2010, which included all of the Duane Reade stores in
the New York City metropolitan area.
All Company sales during the last three fiscal years occurred within the United
States, Puerto Rico and Guam. There were no export sales. Investments accounted
for under the equity method are recorded initially at cost and subsequently adjusted
for the Company’s share of the net income or loss and cash contributions and
distributions to or from these entities. The Company’s investment in Alliance Boots,
which closed on August 2, 2012, and the related second step purchase option
were recorded as assets with a $7.0 billion aggregate value on the Company’s
August 31, 2012 Consolidated Balance Sheet, which represented 30.9% of the
Company’s long-lived assets as of that date. See Note 5 to Consolidated Financial
Statements for additional information.
2012 Walgreens Annual Report 19