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Monday, December 29, 2008

Walgreen to Cut Back on Opening New Stores

Walgreen Co., long known for expanding by hundreds of drug stores each year, said it will cut store openings further amid the economic downturn and continue focusing on updating older locations.a

The retailer is also responding to weak consumer spending by stocking more staple products and pushing its private-label brands.

Walgreen, the No. 2 U.S. drugstore chain after CVS Caremark Corp. with more than 6,600 stores, said it will increase its store locations by 4% to 4.5% in its fiscal year beginning in mid-2009, and increase stores by only 2.5% to 3% in the following fiscal year.

Walgreen announced in July a pullback from its decades-old strategy of allocating most capital spending to new stores. At the time, the company said it would slow store openings to a 5% growth rate by 2011, below its original plan of 8% growth.

Walgreen executives said Monday they plan to remodel stores and scrutinize the merchandise they order, acknowledging that some stores became cluttered and outdated. In certain categories, the chain already has boosted sales by making items easier to find.

Walgreen estimated that the slower pace of store openings will cut expenses by $500 million, on top of the $500 million in savings predicted in July.

Walgreen said its private-label items, which cost less than brand-name merchandise, are selling especially well. Other drugstore chains have reported similar trends as consumer spending slows. The staple items Walgreen is bulking up on include groceries and paper goods.

The retailer said its prescription-savings card, which gives discounts on medicines and other merchandise, seems to be helping Walgreen win back market share that had been lost to Wal-Mart Stores Inc. and other discounters advertising inexpensive generic drugs.

"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 those purchases closely to the beginning or middle of the month, when they receive their employer or government checks," Walgreen President Greg Wasson told analysts during a conference call.

Walgreen also said net income declined nearly 11%, to $408 million, or 41 cents a share, for the fiscal quarter ended Nov. 30. In the year-earlier quarter, Walgreen earned $456 million, or 46 cents a share.

Sales increased 6.6%, to $14.95 billion from $14.03 billion. Sales at stores open more than a year rose 1.7%.

Expenses increased faster than sales, mainly because Walgreen opened a record 212 new stores during the quarter and continued to invest in its Take Care health clinics.

Because it takes several years for a new store to break even, the combination of Walgreen's rapid expansion and its weaker sales trends has weighed on recent earnings.

Walgreen hopes the clinics will attract some of the 46 million Americans who have no health insurance. The company said it has administered more than 1.1 million flu shots this year, more than double the number of doses in the prior year.

Walgreen said Monday that it expects to have a permanent chief executive in place early next year. In October, then-Chief Executive Jeffrey A. Rein retired, following a failed bid to acquire Longs Drug Stores Corp. Rival CVS Caremark closed its purchase of Longs that month.

Walgreen shares declined $1.10, 4.2%, to $24.98 in 4 p.m. New York Stock Exchange composite trading.