MYOPIC OR NOT?

Walgreens considering slowing pace of new stores



Nov. 14, 2007

Walgreens Co., one of America's largest drugstore chains, is considering slowing the pace of store openings. This is a move away from one of its key sales drivers, but it's a decision that its chief executive said would help earnings.
Shares of the company rose 3 percent Wednesday morning.

Could this turn out to be a classic example of corporate short-sightedness; of paying more attention to the near-term rather than the long-term? If so, the stock market appears to have the same myopia.

"We have discussed that within our company," Jeffrey Rein, chairman and chief executive, said of slowing the store opening pace during an investor conference on Wednesday. "We have not made any decision one way or another." Rein said the idea of slowing store openings had good and bad points.

On the plus side, it would reduce the need to develop managers. Rein noted that in 2008 the company would need about 875 new managers due to the new stores, promotions and retirements. The company currently plans to open 550 new stores in the fiscal year ending Aug. 31, 2008, a spokesman said.

On the downside, if the company slows its store opening pace, it risks losing some of the best locations to competitors like Rite Aid Corp., as well as to companies outside the drugstore business, such as banks that are adding branches.

Walgreens operated 6,059 stores as of Oct. 31. The company has expanded at a rate of about 8 percent annually on a square-footage basis for the past several years, a spokesman said. "In the past, organic store growth has been an important part of Walgreens' strategy."

Rein said the company could reduce some of the items it sells to make space for other offerings that could lift sales. "There is clearly an opportunity to wring more sales out of the store base. A lot of it would depend on execution."

Walgreens, like rival CVS Caremark Corp., has expanded aggressively in recent years and has relied on convenient locations to spur sales of nonprescription items such as milk and bread, sometimes commanding a higher price in return for that convenience.

Rein noted that McDonald's Corp. Chief Executive James Skinner is a board member and that McDonald's in recent years had drastically slowed its own expansion to focus on store operations. "If we were to cut back, we would definitely help earnings," Rein said.

Walgreens shares rose $1 to $40.10 on the New York Stock Exchange at midday, after trading as high as $40.35 earlier in the session. For the year, the stock is down 12 percent, compared with a 26.6 percent increase for top rival CVS Caremark Corp.

Notice the comparison between Walgreens and CVS. Could this be what Walgreen's board is concerned about? Is it the pressure to boost the share price?