沃博聯公司 (WBA) 2009 Q1 法說會逐字稿

Good day, everyone.

Welcome to the Walgreen Company's first quarter 2009 earnings conference call.

As a reminder today's call is being recorded.

Now at this time I'd like to turn the conference over to Mr.

Rick Hans, Divisional Vice President of Investor Relations and Finance.

Please go ahead, sir.

Thank you, Melissa and good morning everyone.

Welcome to our first quarter conference call.

We'll started today's call with Greg Wasson, our President and Chief Operating Officer, discussing the quarter's highlights and the progress we have made on our strategic initiatives.

Wade Miquelon, Senior Vice President and Chief Financial Officer, will provide details on the first quarter financial results before turning it back over to Greg.

John Spina, our Vice President and Treasurer is also joining us on the call today.

In addition, I'd like to introduce the newest member of our Investor Relations team, Lisa Mears.

Lisa just joined us this month as Manager of Investor Relations.

We have allowed plenty of time for your questions on the call but please allow yourself to one question and a follow-up to we can give an opportunity to as many investors as possible during our limited time.

I'd like to point out that today's call is being simulcast on our Investor Relations website located at Investor.Walgreens.Com.

After this call, the presentation will be archived on our website for 12 months.

Certain statements and projections of future results made in this presentation constitute forward-looking information that is based on current market competitive and regulatory expectations that involve risk and uncertainty.

Please see our latest Form 10-K for a discussion of factors as they relate to forward-looking statements.

Now here is Greg Wasson.

Thank you, Rick, and good morning everyone.

Let me begin by thanking everyone who came to Chicago for Analyst Day in late October.

We greatly appreciate your interest in Walgreens and enjoyed having the opportunity to meet you.

We also appreciated a breadth of questions posed during the day and your comments and suggestions for our next Analyst Day.

For any of you who missed our meeting the audio presentation slides are archived on our website.

Before discussing the financial results and strategic initiatives we put in place during the first quarter I would like to emphasize that the CEO search process has not slowed down.

The implementation of our strategic growth initiatives in any way.

I can assure you we haven't missed a beat.

We're progressing rapidly on the key initiatives which drive our three strategies.

As our Board Chair and acting CEO, Al McNally outlined at the Analyst Day meeting the Board determined that the search process would consider both internal and external candidates and take about three and a half to four plus months.

At this point we would expect an announcement some time in early 2009.

Now to get started, today we announced that we are slowing our new store openings to 2.5 to 3% by fiscal 2011.

This will reduce our CapEx by an additional $500 million.

Both Wade and I will have more to say about this later.

Net sales for the first quarter were a record $14.9 billion, up 6.6%.

Comp sales rose 1.7%.

Net earnings were $408 million or $0.41 per share diluted compared to $456 million or $0.46 per share diluted a year ago.

Our customer traffic strengthened as the quarter progressed although basket ring was down as customers were buying essentials rather than discretionary items.

Comparable prescription sales rose 2.6% in the quarter, the number of prescriptions filled in comp stores was virtually flat compared with a year ago, but on an adjusted 90 day versus 30 day basis, we would have increased 150 basis points.

For the quarter, we billed 156 million prescriptions, total retail prescriptions increased 3.7% over last year's first quarter.

That compares favorably to an industry wide decline of 0.5% as reported by IMS, excluding Walgreens.

We've talked previously about some of the factors affecting prescription sales, despite these near term challenges, we have seen benefits in December from a recent uptick in the flu and the later than usual Thanksgiving.

We continue to gain prescription market share, we now fill 18% of all retail prescriptions in the country.

We've seen a big increase in the number of flu vaccines administered this season, delivering over 1.1 million shots which are more than twice what we did all last year.

Special thanks to the hard work of our pharmacists and our Take Care nurse practitioners who are successfully building this business.

As I said during the quarter we made great progress on the three growth strategies which you may remember are one, leveraging the best store network in America; two, enhancing the customer experience, and three, major cost reduction and productivity gains.

I'll bring you up-to-date on our progress.

As you can see on this slide, over the last six months, we have substantially reduced our plans for new store openings.

In July, we announced the reduction of the long term growth rate from 8% to just 5% in 2011.

Today, we announced that we are reducing new store openings further to about 4 to 4.5% in fiscal 2010 and about 2.5 to 3% in fiscal 2011.

This decision was made after evaluating the current economic conditions and concluding that we have substantial upside to drive greater value creation by enhancing the best community based store network in America.

As a result, we believe that further long term slowing in new store openings is an important strategic step.

Because this is an increasingly dynamic process, going forward, we will be providing guidance regarding planned store opening data as a range, rather than providing the exact number of openings as we've done previously.

Let me be clear, we will continue to open new stores on the best corners and end markets that deliver the highest return on invested capital.

Our new Times Square store is a great example.

We opened it in November and has already become one of our top performers.

In summary, moderating new store openings will one, support our customer-centric retail initiatives; two, increase flexibility to invest opportunistically; three, save an additional $500 million over the next three years over and above the $500 million we previously announced; and four, drive greater value creation by strengthening the best community based store network in America.

We continue to enhance the customer experience through new customer centric programs and improvements to store Operations.

These include efficient assortment, efficient promotion and refreshing our existing store base.

We're also responding to the current consumer need for increased value by broadening our offering of what we call affordable essentials.

Basic staples such as food items, paper products and other consumables.

We're positioning our stores to take advantage of the new consumer reality for retailers, which means customers are making more purchases using cash and timing of those purchases closely to the beginning or the middle of the month when they receive their employer or government checks.

We're also meeting the needs of our cost conscious customers with money saving initiatives such as our prescription savings club.

This loyalty program serves the needs of the 46 million Americans who are uninsured as well as the millions who are under insured.

We now have more than 1.4 million prescription savings club members and an increase of more than 400,000 in just three months and more than 30% of the PSC members are new Walgreen patients.

As we've said before, our private brand industry, I'm sorry, our private brand business is one of the strongest in retailing and continues to grow as consumers look for value.

We've also had tremendous momentum in our online business, which reported a 45% increase in traffic to Walgreens.com during the month of November.

Another component of consumer centric retailing is testing and evaluating new store formats.

We are under way and as we make progress, we will update you.

Now let's talk about another major initiative which we are making good progress, power.

Power will transform community pharmacy as we know it today, and it is currently being rolled out across Florida.

You may recall Power focuses on one, eliminating a significant amount of administrative tasks from the community pharmacy which will free up pharmacists to play a greater role as trusted clinicians; two, reduce overall pharmacy costs; and three, enable us to increase the breadth and depth of pharmacy services such as flu shots and vaccinations.

In October, we told you that Power was in 152 Florida locations.

Today, Power is in 280 stores in Florida.

The Orlando metropolitan market has been completed and we're well on our way to completing South Florida.

By the end of the fiscal year, we will have implemented Power in all Florida stores, that's more than 760 locations and more than 10% of our total drug stores.

And we've begun providing centralized filling services to 30 stores in Arizona from our Tempe mail service facility.

As you can see, we are well on our way.

We continue to leverage and enhance the core business through our growing pharmacy and health and wellness services and locations.

We opened four new work sites and 76 new retail clinics in the quarter, giving us a total of 661 retail and work site clinics nationwide.

We expect to be operating in about 800 locations by the end of the fiscal year.

As Americans seek to control the cost of their healthcare services, our retail clinics provide cost effective quality care that's extremely convenient to customers.

In combination with our work site clinics and health centers , we help corporate clients control healthcare costs while encouraging healthy lifestyles for the employees, and interest continues to build.

Recently we opened locations for the 70,000 eligible employees and our families at the Disney Properties in Orlando and a new health center in Las Vegas serving 11,000 eligible members.

We continue to expand our Specialty Pharmacy business which represents one of the fastest growing areas of healthcare today, and December 1, we completed the acquisition of a Specialty Pharmacy business from McKesson Corporation.

The acquisition will further strengthen our position as the fourth largest Specialty Pharmacy in the country.

I'll let Wade update you on the specifics of the quarter, the rewiring for growth initiatives, and the financial impact to the date of our new strategic initiatives

Thank you, Greg.

Given the context of the challenging economy, our team worked hard in the quarter to deliver higher sales and control costs.

As Greg said previously, net sales increased 6.6% while total comparable sales were up 1.7%.

This compares favorably with many other retailers for the past quarter.

Net earnings were $408 million, a 10.4% decline from last year.

Prescription sales rose 6.2% and represent 66% of sales for the quarter.

Prescription sales in comparable stores rose 2.6%.

The number of prescriptions filled in comparable stores was virtually flat although as Greg pointed out, prescriptions were up 1.5% when adjusting for more patients filling 90 day scripts versus 30 day prescriptions.

During the quarter we had approximately $0.045 per diluted share cost impact from a variety of items which includes first, an incremental $0.01 charge for LIFO reserve versus a year ago, second, a $0.01 cost, one-time charge for rewiring for growth, third, $0.01 of interest expense above the year prior, and lastly, about $0.015 of year on year incremental investment for our retail clinic expansion.

Gross profit in the quarter was $4.2 billion, a 5.9% increase, reflecting a challenging business environment.

Gross margin was down 20 basis points in the quarter compared with the prior year.

The overall margin was negatively impacted by lower margins of a non-retail business and a higher LIFO provision.

This is partially offset by higher retail margins as a result of the impact of generic drug sales.

Front end margins were essentially flat year-over-year.

SG&A expense increased 9.1% in the first quarter compared with an increase of 10% last year.

While our base cost control was very robust, this level of SG&A growth above sales growth can be attributed to three causes.

First, we opened a record number, 212 new stores in the quarter and that is a very large driver of SG&A.

Second, as I mentioned earlier, we continue investing in our retail healthcare clinics, and finally, we incurred some one-time costs associated with rewiring for growth and these are essentially all in SG&A.

We have made significant progress in controlling the growth of SG&A in recent quarters and as you can see from this chart, SG&A dollar growth in the quarter on a two year stack basis has steadily declined from 28% to 19.1% despite very aggressive store openings.

The same three issues that I highlighted a moment ago and in the previous slide is negatively impacting our business near term will actually begin to benefit SG&A in the future.

For example, slowing new store openings will allow for significant slowing of SG&A.

We are likely to have our highest loss quarter and highest loss fiscal for retail clinics this year, and we will receive significant ongoing cost benefits through wire for growth beginning the end of this fiscal and on into 2011.

Now let's look at a few other financial drivers in the quarter.

The effective tax rate was 37.6% compared to a rate of 37.4% in the year ago period.

Net interest expense was $15 million compared to $0 last year due to the issuance of $1.3 billion in long term debt.

The LIFO provision was $43 million versus $27 million in the first quarter of 2008.

In the quarter we invested $638 million in addition to plant, property, and equipment versus $490 million last year due largely to the addition of 212 new stores versus 166 last year.

In fiscal 2009, we plan on opening a total of 540 new stores yielding 475 net new stores.

And our capital spending has been a bit front end loaded this year and we continue to estimate the capital spending for the full year will come in at around $1.8 billion.

Accounts receivable were up 23.6% in the quarter and this was driven primarily by reimbursement timing, non-retail sales mix, which has a higher normalized DSO and also the end of the quarter falling on a Sunday.

Inventories grew by 9.9%, driven primarily by record new sales growth, slower comps and the effect of seasonal goods.

Accounts payable increased 22.4%, due primarily to timing of disbursement, given the Sunday quarter end and the increase of inventories.

Our net debt at the end of the quarter was $1.5 billion, reflecting short-term borrowings of $1.1 billion, long term debt of $1.3 billion, and offsets by cash and cash equivalents of $886 million.

As we discussed at Analyst Day, we are targeting $1 billion in annual cost reductions by fiscal 2011.

The three primary areas of opportunity include strategic sourcing of indirect spend, corporate overhead and store labor reductions and power, which also includes work load balancing.

We are making significant progress in all three areas.

This next chart shows a schedule of timing of costs and benefits associated with rewire for growth.

As you can see, during 2009 and 2010 we will incur one-time costs of 300 to $400 million to achieve our long term objective of $1 billion of net cost reductions by fiscal 2011.

We also expect to achieve working capital benefits of an additional $500 million through our customer-centric retailing initiatives.

In short, we are confident that our three strategies will enable Walgreen's to get back to a path of strong EPS growth performance.

Now the last thing I'd like to focus on before I close, our exceptional balance sheet and strong cash flows are enabling and will enable significant financial flexibility as we move forward.

Our commercial paper ratings of A1 P1 and our long term debt ratings of A-plus A2 give us the ability to drive our strategies and do right things right, at a time when many other corporations are struggling with liquidity.

We're proud of our credit ratings and we are committed to maintaining our high investment grade position.

Further, our decision to slow the pace of store openings, to strengthen and enhance our core, and to reduce unnecessary costs will only further strengthen our balance sheet and insure that we have ample financial flexibility for a very strong future.

And now I want to turn the call back over to Greg Wasson.

Thanks, Wade.

I'll finish with saying how extremely proud I am of the superb leadership team that we continue to build at Walgreens.

To that end, today we're announcing the addition of three new Vice Presidents who are experienced leaders with track records of growth and success in their respective industries.

Their contributions will strengthen our Walgreens management team and give us an even stronger blend of external talent and internal expertise.

Bryan Pugh, most recently with Tesco's Fresh & Easy Neighborhood Markets joins us as Vice President responsible for the development of new store formats, and will be focusing on affordable and essential merchandise.

He helped design the Fresh & Easy store Operations model and launched the retail grocery chain on the West Coast as it grew to 90 locations in less than a year.

Colin Watts, formerly with Campbell Soup Company and McNeil Consumer Healthcare Worldwide, becomes President of Walgreens Health and Wellness Disease Management.

Colin brings significant healthcare industry expertise to Walgreens and has a proven track record of growing consumer and healthcare companies in the US and globally.

Jeffrey Zavada, formerly National Vice President of Key Accounts for United Healthcare, joins Walgreens as Vice President and Chief Sales Officer.

We look forward to his expertise in helping Walgreens build a world class sales organization in order to continue to broaden and deepen our payer relationships.

In summary, Walgreens has a winning strategy, an exceptional leadership team and a strong focus on execution to grow our business and create long term significant value for shareholders.

I've never been more confident about our future.

Ladies and gentlemen, that concludes our prepared remarks.

We're now ready for your questions.

Melissa, may I have our first question?

We'll take our first question from Lisa Gill with JPMorgan.

Hi, thanks very much and good morning everyone.

I just had two quick questions.

First, Wade, is there any way you can break out for us the SG&A as it pertains today to the new stores so we can get an understanding of what your run rate looks like as you start to think about the slowing down of the stores and we start thinking about modeling for that, and then secondly, just wondering what you're seeing, where you're taking customers from with your Rx savings club plan and then further to that , as we start thinking about things like electronic prescribing, et cetera, how will that also impact some of the programs that you have in place around your generic

Okay, well I'll kick it off and let Greg join in here but on SG&A, I guess the way I would frame it is if you look at our same-store SG&A year on year and in the direct cost, hourly labor, et cetera, effectively, that's in the 0 to 1% range, or actually below our rate of comp sales, so but the balance of it is all new real estate.

There's obviously other items in there some of which I mention like rewire investment, and that gives you I think a general feel for the relative level of SG&A that we put into new stores and on a base level we have a pretty good sustainable model now in cost control.

On the PSC card or the Rx card I'll start there.

I guess I would just say that we are seeing a lot of traction and from a financial point of view, I think it's a good thing because there is a fair amount of turnover churn in prescriptions and really this is capturing a lot of that and so net, net, net, it's financially accretive and also a great driver of loyalty.

Greg?

And Wade, where are you taking those customers from?

Are they coming from other retailers or are they coming from the supermarkets, from Wal-Mart?

Where do you think you're taking them from today?

Lisa, this is Greg.

We don't know truly where we're taking them from, but I think the opportunity is a 46 million uninsured, of the folks that didn't have cash and maybe some folks that weren't really taking medication or staying compliant on medication, the two big ones that we're seeing is we're seeing 30% of the patients on the PSC card are new adds and we're also seeing increased compliance once they are on, so I think the opportunity is huge with the 46 million out there that are uninsured.

Yeah, and I would pile on.

I mean we can't prove exactly where the share is coming from but we do know as we track for instance the $4 scripts, the generics that fall into that bucket that we've actually gained share in that now year on year after a year ago being tougher so I think it is a lot of the cash customers, and again I can give good validation it's hitting those particular scripts.

And Lisa to your e-scribe comment, two things, we're certainly seeing increased compliance of prescriptions.

We see more people picking prescriptions up that are on e-scribe once the doctor has written the order and I think you'll certainly see increased formulary compliance which will increase generic utilization as well because the doctor will be able to see the formulary much easier.

Okay, great.

Thank you.

We'll take our next question from Mark Miller with William Blair.

Hi, good morning.

I was looking for more color first of all on the gross margins.

How much were pharmacy margins up, and then when you give the break down, is the higher LIFO charge netted in those qualitative descriptions on pharmacy and front end and then in the non-retail margin decline, how much was that and what was the decline in the recurring businesses ex the growth in clinics?

Okay, I don't know if we can give all of the strategic detail but effectively pharmacy margins were up slightly, front end, we're close to flat year on year and yes LIFO for both is embedded in both.

Recall we have about $200 million for the year in LIFO or an increase of roughly $100 million planned.

In terms of specialty, specialty does have lower margins and that's grown faster than the business so they aren't declining versus where they were.

It's simply just a mix effect of faster growing versus slower growing, and retail clinics as I called out is about a $0.015 year on year drain to overall profitability and that also has a disproportionately low gross profit just because of the nature of work costs allocated for that business.

So I hope that gives you directional feel, but essentially front end and back end were basically stable to up slightly, and all other factors bringing it down back to neutral and the other businesses pulling down as I said.

And Mark, Greg.

I'm sure just as a reminder that specialty margins may be tighter but the gross profit dollars as you know per script are huge.

My other question is, can you give us any qualitative comments on December thus far and the holiday selling season and then Wade, if you can elaborate about your comment about inventory.

I think you said the higher increase was reflective of some effective seasonal goods and what type of markdown risk might we be looking at in this environment?

Well, we'll certainly be giving more information on December sales the first of January.

I think certainly as you know, we lost a week of sales, holiday sales in the quarter.

We're certainly continuing to see a concerned consumer; however, I think that Mark, I guess the thing I'm really glad of is that we're selling things that people need, and as more people are leaning toward affordable essentials and staying closer to home I think we're well positioned but we'll give you more color in January.

And on the inventory we did see a little bit of a bump just because of a few things.

Number one as we always see both of this time of year seasonally but also over the last few quarters we have had slightly lower comps and so a lot of these items are bought well in advance but as we sit here today we're seeing that we're working through that inventory bubble.

I don't see anything above and beyond what we normally do in terms of writedowns here.

Again as we talk, I think at the Analyst Day related to rework for growth in terms of total efficient assortment there may be charges but that would be well covered within what we've outlined before related to that project but again it's a bit seasonal.

It's a bit just adjusting to the new reality of the economy but we're working through that.

I think the two big drivers of inventory were the Thanksgiving shift in our new stores.

I think the encouraging thing, Mark, is that front end margins were flat and traffic is up so I think we really have been surgically using promotion to drive inventory movement when needed.

I was surprised your front end margins were up so that looked good.

Thanks.

Thanks Mark.

We'll take our next question from Eric Bosshard with Cleveland Research Company.

Good morning.

Good morning Eric.

Two things.

I guess first the change which is material in the store growth today versus 90 days ago, I know strategically 90 days ago you made the decision you made and now you've taken another step down.

Is there something you've observed in results or some analysis you've done other than just seeing economy is soft to make the decision to further reduce the store growth as much as you have?

I think I would say perhaps the biggest material change is just the economy continues to shift and change, it becomes more uncertain all the time so I think that's probably part of the factor.

Related to that, I think that there will be opportunities for more file buys.

We may see more consolidation in the industry and I think it behooves us to make sure we have financial flexibility to do that and I guess lastly, I think we do believe that our strategies especially around the customer centric work and getting more from the core and making the stores better is just the single biggest value creation lever we can pull and everything we can do to focus on that and support that is going to pay dividends.

Yeah, Eric.

I think as we get further along the lines of consumer centric retailing initiative, the wage point, I think we're seeing more opportunity to juice the existing 6500 stores we have with more efficient assortments, adjacencies, refreshes, repaintings, remodelings, I think that's where we're really excited.

Secondly, is 9% SG&A growth which is what it was in the first quarter, is that about as low as it can go considering the store growth investment that's embedded in the business, at least for this year?

Or can you do better than that?

I wouldn't say it's as low as it can go but it's pretty darn good.

If you look at the huge driver of the new stores and if you look at it on just a no new store basis it's pretty good but again, I'd say the structural systemic things that we're doing in rewire to get that $1 billion going over the next three years are going to provide further step downs, if you will.

So I think it's as good as it can be without the structural interventions that we're putting in place but those interventions will be significant.

I'd like to add, Eric, this is Wade, I think the SG&A control we're seeing in the core business, the core drug stores has been pretty robust and as we see a couple of these major initiatives come on, we see benefit.

And then lastly, on Page 20, you have a chart that talks about returning to double digit earnings growth and the arrow seems to point up as we look at 2009.

Do you want to give some guidance on how we should think about 2009 earnings from the Company?

I guess here is how we frame it.

If we look at the last quarter and this quarter, recall last quarter I think we were up 10 to 11% but we had an accrual adjustment in there so effectively apples-to-apples we were kind of flat year on year.

This quarter with our 1.7 or 1 to 2% comp we had some other negative things that went the other way so effectively we were again flat year on year, so in this kind of 1%, 2% comp range, that's where we are before interventions.

And I think the kinds of things that are going to help us move into the back end of the year into the future will be again the customer centricity, big opportunities there, the rewiring, a big step up there, slowing of stores is definitely going to help over time but it's going to take some time to get that benefit and then I think the other wildcard out there is just the overall economy which is challenging for everyone now but I do think that given that we're more destination in nature, more kind of essentials in given that we're probably going to see some industry consolidation over time, that will probably be in that as we go along but again without giving guidance for the year, I just want to give perspective on really the last kind of quarters have netted down and feeling in the out periods what kind of things we're doing to bring that up.

That's helpful, thank you.

We'll take our next question from Deborah Weinswig with Citi.

Hi, this is Nathan Rich filling in for Deb.

My question is around the rewind for growth initiative.

How does slower square footage growth change the cost savings that can be achieved with the rewind for growth if it does at all?

Really it doesn't at all.

The things we're looking at, obviously we'll get one benefit over time from slowing store growth just because there's so much front loaded costs, to bring new stores on and we're diverting attention from making the core even stronger but with respect to how we factored in the savings and what we're looking at, that's not really part of the equation.

Okay, thank you.

And then my second question is just in terms of a little more color on what front end categories are performing the best?

Yeah, Nathan.

As we said we're seeing strong increases in consumables, the affordable essentials we're talking about, groceries, snacks , paper products, basic needs that people are looking for.

The discretionary categories are tight and non-discretionary are up.

We're also seeing strong, we're seeing good increases in over-the-counter items and our private label brands as people trade down and look for value we're seeing

Great.

Thank you and best of luck.

Thanks.

We'll take our next question from John Heinbockel with Goldman Sachs.

Two quick things.

Is there any sign yet with unemployment rising that there's some impact, further impact on consumer behavior in terms of pill splitting and script volume in general and then secondly as a corollary to that are you seeing incremental pressure on reimbursement from companies whose budgets are under pressure?

So as far as, thanks, John, Greg.

As far as impact on scripts with unemployment, you know, it's hard to say, certainly we've all heard where folks are visiting doctors less and picking up less prescriptions and that may be affecting the industry number but the good thing is we're seeing strong increases for prescription sales numbers are up.

We saw strong increases in the amount of flu shots that we administered.

Our PSC card is showing strength so we're pretty encouraged with the trends we're seeing in pharmacy right now.

John, I would say again, as Greg alluded, I think we've kind of seen a bottoming or strengthening on the prescription side so there's really no short-term evidence of worsening.

I think that we're seeing different behavior patterns is really more on the front end and again more towards those discretionary items as Greg talked about, it's more towards private label.

It's more towards paycheck time, more towards weekday buys versus weekend buys so you're really seeing effects of the economy there, much more than you're seeing it right now in the prescription side.

All right, and then secondly, if you look at WHS as a whole and think about its P & L impact, could you just discuss that a little bit?

Obviously it sounded like it was a negative impact on margin and maybe even on expenses.

Do you think WHS was dilutive to the growth rate for the quarter or additive or what would the impact have been more from a bottom line standpoint.

WHS wasn't dilutive from an earnings point of view but again because the specialty businesses have lower gross margins and because they were growing faster than the balance it hit the gross margin impact a little bit.

It was really the hit that I talked about, that $0.016 that was on the health and wellness division side and that was the plan but that's really from the ramping up of (inaudible).

So we're going to start leveling that off and then we'll start cycling this but this is really again our biggest investment year that we see on the clinic side.

I'll just leverage on that too is that they're still on track in terms of the two to three year ramp up to profitability so it doesn't mean that we have any less confidence that these things over time make sense.

Okay, but WHS in total, you put everything together, earnings or operating income, up or down versus a year ago.

Sounds like it might have been down.

No, no, I didn't say that.

Okay.

So it did not detract from the EBIT growth rate of the whole Company?

No, no.

The health and wellness division again had $0.015.

Right.

Right.

But WHS did not.

Okay, thanks.

We'll take our next question from Ed Kelly With Credit Suisse.

Hi, good morning.

Good morning, Ed.

I'd like to just get back to your decision to cut the growth again.

I certainly applaud the decision, although you don't currently have a new CEO in place as of yet.

I was just wondering, it does sound like you're very close, so with the new CEO on Board with all this I'd imagine that's yes and then secondly, I think the fear from investor s will be that you are moving pretty quickly to do this and I think their fear is going to be that it's driven by deteriorating fundamentals as opposed to other opportunities , so could you maybe just

Yeah, Ed, Greg.

I certainly will.

I think as Wade said, in looking at the economy, and making a prudent decision to where we're headed and how we want to use our capital going forward, I think that's a big part of it but more importantly, it's certainly a very strategic fit as we see it, and I think that we've got 6500 of the best locations out there to date.

We talked a lot about leveraging and enhancing that core business and those core drug stores as I said with what we're seeing with our customer centric retailing there's just incredible opportunity to really juice and really bring those stores on as we go forward, so I wouldn't read much more into it than the fact that it makes sense in this economy and the fact that we think there's a lot of opportunity.

Yeah, again, there's no deteriorating in the fundamentals.

I would just say that.

I think it's a matter of being smart about our capital allocation choices, and the value we can create by putting more into some of these levers, refreshing stores, enhancing the experience, potentially more file buys or whatever may come is greater than the value of opening stores at the prior rate, and that will be our beacon as we go forward here.

And as Wade alluded to our balance sheet, it gives us the flexibility as we go forward, a strong balance sheet to take advantage of opportunities, and we feel that's critical.

Yeah, okay.

And then Wade, just a second question for you.

The FICO gross margin even if I ex out the LIFO charge, is balanced around quite a bit the last few quarters.

It looks like it's up about two basis points this quarter, down 41 last quarter.

How should we think about this going forward?

If we're in a current steady state where we are today are we looking at sort of flattish, maybe a little bit better excluding LIFO charge?

You mean with respect to overall earnings or respect to --

Gross margin, sorry, the FIFO gross margin.

Yeah, I mean, I'd hate to try to forecast completely here.

I think we're kind of bouncing around the flat range.

There has been a little bit of promotional pick up for everyone as we come into December and the holiday season here and we're not doing silly things but we're making sure we are competitive in that regard in providing value but again, I'd say that it's difficult to fully predict.

We're seeing pick ups from private label.

That helps.

We're seeing more essentials, that hurts a little bit, but I think in general we're doing a pretty good job of holding our own.

And are you seeing change from your chain drug store competitors from a more promotional standpoint?

I think the whole industry is up.

I just saw the other day for many retailers it's double year on year so there is some increase.

Maybe Greg will jump on here, but I don't think again we're not doing anything crazy.

We're just making sure we're competitive.

We are seeing some early markdowns out there across the industry both in the drug channel and throughout retail.

We're happy and glad that we had purchased and bought down last year our seasonal merchandise, and we're making some good intelligent decisions as we go forward.

We're watching items and watching them daily making adjustments where possible and we're certainly seeing industry react in a more aggressive way and probably being surgical as we go forward.

Great.

Thank you.

We'll take our next question from Mark Wiltamuth with Morgan Stanley.

Hi, good morning.

When we previously heard from you on slowing your store growth down to 5%, the slowdown to 5% was really driven by just what was in the pipeline and just the natural phase down of that growth.

Are there any leased charges or termination costs associated with slowing down to 2.5 to 3%?

Well, Mark, we're looking at, we're certainly not looking at any signed leases or signed deals.

We're looking at unsigned deals, deal by deal.

Some of those may be further out, a little less difficult, some of those are closer into maybe some cost to it.

I'll let Wade touch a bit on that.

Yeah, I don't think anything significant, if there is any it will be certainly covered by our kind of overall rewire effort, and I'd also say that we have a pretty intensive process to continue to look at all our stores and make sure they are performing and make sense and to date I can sit here and tell you that there's a number of stores that we maybe should shut down because they aren't productive or but they're less than a handful, so there's nothing material there either.

Okay.

We'll look at these case-by-case and deal with them but as Greg said none of these were signed deals so it's just a matter of working them through one by one.

Now that you've got up to $1 billion in CapEx savings here, any thoughts on where to deploy that?

I think we're still looking at that.

We want to obviously be smart about it, be flexible, make sure we can reinvest in our strategies, make sure if the right value opportunities come along, higher ROIC that we look at those but I think I guess what I would say is right now, we're sort of in an analyze mode and also making sure that this economy that we have stellar liquidity and a stellar balance sheet because I think right now, that's just gold.

Okay.

I guess previously, you'd kind of hinted that you might put that towards acquisitions on the new strategies.

Do you think it's still heading in that direction or more towards balance sheet, shoring up the balance sheet?

Well I think we'll put it where it makes the most sense to give us the greatest return.

We're definitely going to use it to drive our strategies as we said earlier, there's a lot of opportunities we're learning through customer centric retailing we can put back into our stores so that would be a top priority.

Obviously we'll look at opportunities as they exist out there and consider those as they come about.

Okay, thank you.

We'll take our next question from Meredith Adler with Barclays Capital.

Thanks.

I have two questions.

The first is if you could talk about sort of how competitive it is to buy files right now.

You guys for many years weren't really in that market.

I know that it's mostly whose closest is willing to pay the most, but are you seeing it become more competitive?

Meredith, not really.

We've been buying files for years.

I think with the economy and the challenge and struggles a lot of the independence and small chains are having today it's probably a little more opportunity over the last couple of years.

We certainly look at these just like we look at any acquisition or any opportunity to make sure to give us the return on investment that we need.

We've got a group out there that is aggressively talking with Independence and I don't believe, I wouldn't say that it's heated as far as competition.

Great.

And my other question really comes back to some things that were said at the Analyst meeting and you talked about a little bit today about your power program and work load balancing.

There was a time a few years ago where work load balancing was really highlighted as being a very big opportunity and I mean using stores and excess capacity at existing store, and then the shift to a more central fulfillment is kind of achieved.

Could you just talk about, I don't understand really why you went in that direction.

Well I think with work load balancing as you described a couple years ago, we have seen benefit and that really helped us move work between stores and really help existing stores continue to grow volume.

You have a store out there that may be averaging 300 to 350 a day and a store down the road trying to help them you see that in increased lift.

I think what we're beginning to see now with ours is a huge opportunity to leverage the entire enterprise, our mail service operations as well as our central fill and central processing utilities to move work around.

We see the opportunity to fill as many as 30 to maybe 40% of our chronic prescriptions centrally but a big part of power is not just central filling of prescriptions, Meredith.

It's shifting the order entry work and the insurance processing to a more efficient platform to become more efficient, allow the store pharmacist to spend more time with patients.

And Meredith the way I think of it is is they aren't at all different direction.

In fact they are evolutionary and complimentary because the work load balancing is the first step of being able to do that virtual paperwork flow, call it and a central fill goes beyond that to do the physical work as well and again as Greg said, it's not just about the cost but about freeing up those resources, and the work load balancing will always play a role as it did in some of the hurricanes, being able to on the spot shift the paperwork and be fluid there, it's also a nice tool in the arsenal, if you will, to help reduce costs.

I think that the difference is that you said that you have a lot of immature stores and that fixed cost is already in place at those stores to build the capacity you need in power you actually have to add more capital and essentially more fixed cost so I guess I'm still a little confused, why not leverage what you already have.

Is there a regulatory constraint"

No, but from the paper flow point of view, that's true.

We can leverage that in place but over time that's not going to be the best systemic solution.

We aren't going to have the kind of central scale you're going to get in a central facility for either the paperwork or the physical flow by leveraging that network but we are taking advantage of those new stores that way, but again that's more of an evolutionary short-term fix versus end game where you have true scale.

Meredith I guess I wouldn't look at it as one or the other.

We're leveraging both.

Work load balancing is allowing us to continue to leverage those new stores now as we speak; however it allows us to really move a lot of work into a more efficient manner on top of that.

Great and I actually have one final question.

Back to the discussion about the front end and seasonal merchandise.

Is it your expectation, did you go into the holiday with a very low level of inventory, or do you believe that you'll end up having markdowns that might be noticeable in the front end gross margin?

Well as I said earlier, we did go in with less inventory last year.

We did anticipate a tougher economy.

Going into next year, we'll probably be looking at even further reductions as we buy for holidays and seasons.

But right now I think we feel pretty good.

As I said we're watching inventory daily, making adjustments , moving merchandise around from store to store, and market to market, so I think as we move toward the end of the season, we'll see more, but I think we're managing it pretty effectively at this point in

And yeah, the wildcard still is this is recent weather snow and cold snap, we'll see how that plays out here in the next few days, but again I don't think that we're talking anything real significant above and beyond the usual which we always have.

Great.

Thank you very much.

We'll take our next question from Steven Halper with Thomas Weisel Partners.

Hi.

Could you just go through your thoughts on the SKU rationalization efforts and is there something there that prevents you from going even quicker than you have been?

Steven, good question.

We have gone through about a little more than 30% of our total categories already, as far as looking at the efficient assortment, the adjacencies, and moving very quickly there, we'll begin to see rollout of those categories as early as May and we intend to move pretty quickly so we're really encouraged and I think the team is moving pretty quickly to move through the categories.

Yeah, I think, the speed at which we're doing it might seem long to you but it really is extraordinarily rapid for the number of categories we'll be changing, but it's a very important move so it has to be done right and vetted with research, with shoppers, qualified, and it has to be executed flawlessly in the stores, so again, I think as Greg said, by May here we're going to have the first big wave and we're working our way through almost half of all categories now in terms of doing the work but I don't think we could be going any faster and doing it in a quality way at this time.

Thanks.

We'll take our next question from David Magee with SunTrust Robinson Humphrey.

Yeah, hi, good morning guys.

Just a question on the LIFO charge.

Did I hear you say that the expectation is for $200 million this year?

I think it's about 185 or something.

I forget the exact number but that's almost double of year prior.

Could you just talk about that a little bit, just given the fact some retailers are talking about potentially deflationary environment next year?

I would say that we actually, if you think about the year being broken into four quarters, we're actually ahead of pace a bit for that annualized rate, but that's because we saw last Fall we saw a lot of big price increases coming through as a step up, when all of the commodity prices were up, and now I think what we're not going to see necessarily is we're not going to see, A, a lot of more increases on top of that or B, a lot of these front end suppliers aren't going to be dropping their price directly either.

They might promote more, but you seldom see list price declines so that's the front end.

On the pharmacy end, we'll have to see how it goes the next month or two but we have seen some price increases and especially on the branded side, and there may be more before the next administration is fully in place so I would just say it's too early to tell at this point but we think overall for the year that's a pretty good number.

And then just secondly on the one-time costs associated with some of the cost initiatives, like Power, can you give a little more color as to what constitutes those costs on a one-time part?

Yeah, over time, it's obviously going to be things like consultants that are helping us.

It's going to be things like potential with the SKU, simplification and elimination.

We're going to see some potential writedowns associated with that, and there could be obviously some people cost, transition costs.

Those are the big buckets.

In this first period, the bulk of it would be people costs associated with helping do the work, so things like consultants and other ancillary charges.

Great.

Thanks a lot.

We'll take our next question from Scott Mushkin with Jefferies & Company.

Hi, guys, this is Bakley Smith filling in for Scott.

Most of my questions have been answered but I just wanted to get at the reduction in square footage growth a little bit.

I mean, do you think, were you sort of growing too fast before, and now you feel like you've right sized or do you feel like your view on the industry and the opportunity out there has changed significantly in the last, six months or a year?

I think that I wouldn't say we're growing too fast.

I think we've got, what we did in the past is organically we found some of the best corners of America, and I think now we realized we have 6500 of the best locations and there's opportunity to take that capital and free it up and invest back into those stores to drive some incredible value.

We're going to continue to invest and find those best corners.

We're still going to look for the best corners across the country.

We're going to look for markets that make sense strategically to continue to grow share in, and certainly make sure that it gives us the return on investment we're looking for.

And do you, I mean, could we call this like a planned remodel?

Do you have a new remodel in mind or is it sort of in process?

I mean it sounds like you're going to step up the remodel effort a little bit and is there sort of a program that's going to be associated with that, or is it kind of ad hoc at this point?

No, it's work in progress.

I think it's part of the if you think about consumer centric retail initiative, first you'll see a new category planograms rolled out through all stores that we talk about coming out in May with more efficient assortments, the adjacencies, departments move closer together that makes sense.

At the same time we're looking at new design, new format, and that's what you will hear more about.

Certainly we've got to understand more as far as where we're headed and put the cost to it.

We understand how much capital will be required.

Okay.

Thanks guys.

Happy Holidays.

Folks, thanks.

That was our final question.

I want to thank you all for joining us today.

A couple of quick reminders.

We'll announce December sales on January 5 so we'll host our annual shareholders meeting on Wednesday, January 14 at Navy Pier in Chicago.

Remember it begins earlier this year at 10 a.m.

Central Standard Time.

As usual we'll host an Analyst Q & A session immediately afterwards.

Our next quarterly financial announcement will be Monday, March 23, when we announce fiscal 2009 second quarter results.

Until then, have a Happy Holiday and a great New Year.

Thanks.

Thank you.

Once again that does conclude today's call.

We do appreciate your participation.

You may disconnect at this time.