Walgreen Co. (WAG)

January 09, 2013 5:00 pm ET

Executives

Rick J. Hans - Divisional Vice President of Investor Relations & Finance and Assistant Treasurer

Wade D. Miquelon - Chief Financial Officer, Executive Vice President and President of International

Gregory D. Wasson - Chief Executive Officer, President and Director

Analysts

Eric Bosshard - Cleveland Research Company

Rita Spitz - William Blair & Company L.L.C., Research Division

Edward J. Kelly - Crédit Suisse AG, Research Division

Herbert C. Blutenthal - Hartline Investment Corporation

Mark R. Miller - William Blair & Company L.L.C., Research Division

Mike Otway - Jefferies & Company, Inc., Research Division

Presentation

Question-and-Answer Session

Rick J. Hans

Okay. So Wade has arrived. So we will begin the Q&A session. And so just raise your hand, please, and Nick will come around and hand you the microphone. Go ahead and identify yourself, if you don't mind.

Eric Bosshard - Cleveland Research Company

Eric Bosshard, Cleveland Research. Interested in -- you bought drugstore.com year ago or a few months ago. So interested in what you're doing with online, what you see in terms of online competition. It appears that Amazon's pursuing obviously lots of other retail categories with success in what appears to be [indiscernible] exposure. Just interested in online penetration, your category and how you see yourself participate in and being impacted by that.

Wade D. Miquelon

Okay. [indiscernible] briefings. Obviously it'd be great if [indiscernible] was here. She'd go into much more detail. I think first off on drugstore.com, that acquisition for us is ahead of what we would call booklet. So it's exceeding our objectives. So in terms of revenues, profits, et cetera. I think it's also been a great catalyst for us to just to not only learn and expand the market, but to do some longer tail things and prestige and beauty and other things that we couldn't otherwise do in our stores.

I would say for us, the online or, let's call it, multi-channel, omni-channel, whatever you want to call it, there is probably 2 kinds of vectors of opportunity. One is just making it part of a ubiquitous experience. So a huge percent of our scripts are now ordered via mobile or online, which simplifies things for us and makes it easy for the patient. Just the amount of information that people are using, the way we're building our health information system, our HITs and others, to be able to interface how mobile apps with loyalty is now providing easy access ability to redeem points and probably ultimately mobile wallet and a variety of things. So I think that the e-commerce team is doing an awesome job, making it kind of an enabler to the whole experience.

And then there's the e-commerce sales directly, just order online, delivered at home. That business has been growing very nicely. I don't know the given statistics, but I'd say we're not different than others.

I think the big frontier for us though, and we've alluded to it a little bit, is there are some opportunity for us, I think, to combine our physical assets with the online assets to create experience and things that are not going to be replicatable by someone who is just a brick retailer or someone who is just an online player.

So we've done some various pilots and other things. But I think for us, ultimately, becoming ubiquitous, being able to use all of our assets and surround people when they want, where they want and how they want it is an interesting play. I mean when you think about it, our stores in a way are like having 8,000 DCs if leveraged correctly. So we're looking at lots of different options there.

Unknown Attendee

Gross margin side of things. Obviously a phenomenal gross margin quarter. It would seems like you're positioned well given where the generic wave is right now for the next quarter or 2. Is that right? Is that the correct perception, sort of, in the near term? And then as we look into now lapping what's going to be this way this year, should we expect gross margins to be down just because of the dynamics in a way that the generic cycle plays out?

Wade D. Miquelon

Well, I think our gross margin percentage is probably going to increase for a long time just because of the mathematics. We make a higher gross margin percentage in generics than we do on brands. But remember, the way we look at it is gross profit dollars per script. That's really -- that's kind of what these reimbursement dispute has been about, which is we run all the brands, generics, everything through a sausage grinder. We get to what we think is a fair dollars per script. And if we get that, we don't care exactly how we get there.

So with generics, we're going to have a lot higher percentage than you would with branded. I mean, I said historically, the branded average, gross profit on a $200 script for the industry is $7 or $8 versus generics on a $25-ish, might be $15.

But having said that, I think that our gross profit dollars per script is -- we've never had a better commercial book for the very long term. And even path to generic way, we've structured ourselves in a way that I think that we're going to have a very stable leg for a long time. That might have meant that we gave up a little bit of upfront gravy in terms of how we think about corridors, et cetera. But again, I think that our business, even past the generic wave, is going to be able to earn very solid gross profit dollars for as far as I can predict. So I don't ...

Unknown Attendee

[indiscernible]

Wade D. Miquelon

Well, our model is if we can have remotely stable gross profit dollars per script, because the way we're driving efficiencies, is we can be very successful financially. And historically, we had a few pennies per year creep through brand inflation and other. But for the past couple of years, it's been more of kind of stable. But having stable for us, the way they can drive again efficiencies, it works for our model and for riding the expectations that people have. The key is just not just having the bottom fall out. And I think the part of the reimbursement dispute was exactly about that where you've had one payer who wanted to pay dramatically less than the rest of the market. And as soon as you do that, then every other payer says, "Well, why shouldn't we get it as well?"

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