Walgreens Forecasts Huge Private Label Upside

March 29, 2011

Walgreens Co. retained its gross profit margins and grew gross profit dollars with the help of private label, which has huge upside potential, executives said during a recent call with analysts.

The drug chain posted record sales and earnings for the second quarter and the first half of fiscal year 2011, driven largely by its pharmacy and front-end sales, including private label. Future growth will hinge on continuing to expand and leverage private label, executives said.

Wade Miquelon

“Our private label tends to be about 20 percent. We continue to increase that over time,” said CFO Wade Miquelon. “We continue to strengthen the team. We've got a very strong private label team. Duane Reade had, not only a strong team, but they are also had great tiered offerings, differentiated offerings in some categories like foods, for example, where we were not as strong as them. The big story for us is to continue to enhance our capabilities, continue to fill out what I call our architecture in terms of the various tiers and what the brand nomenclature is going to be like across the store, and we just see that we have really tremendous upside here.”

President and CEO Gregory Wasson added that the private label opportunity is two fold -- in over-the-counter medications and health and beauty care products, and consumables.

Gregory Wasson

“We've got a very strong private brand already, in over-the-counter cough and cold, that type of product, that we have the opportunity just to make it even better and drive that even greater,” he said. “We also have the under-penetration I've talked about before in consumer consumables, which is where the Duane Reade expertise …can help our existing team tremendously. So we feel we’ve got good upside there.”

Sales for the second quarter topped a record $18.5 billion, up 8.9 percent, while sales grew 7.5 percent for the first half of the year to a record $35.8 billion. Same stores sales increased 4.1 percent in the quarter, while front-end comparable drugstore sales increased 4.3 percent in the quarter (excluding Duane Reade stores).

Gross profit margins held steady versus the year-ago quarter at 28.8 percent despite rising commodities prices. Total gross profit dollars increased $427 million, or 8.7 percent, in the quarter, of which 3.1 percentage points was attributable to Duane Reade.

During the question and answer session with analysts, Miquelon said Walgreens will continue to leverage its pricing strategy and power “opportunistically to drive our private label even harder if need be. We'll make sure that we have key price points versus competition. We'll make sure that our KBIs [key buying influences], the most important items we have, are priced right every day. So I think we'll be able to manage it very effectively, but I think it also gives rise to opportunity.”

Walgreens’ is not immune from commodities price increases, however, Wasson said, noting they will have to pass on what they can in the form of price increases, but “stay competitive, and drive private brand to balance it.”

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Keywords: private label growth

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