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DEERFIELD, Ill. — Walgreens Boots Alliance (WBA) plans to close 600 stores starting next year as it rationalizes its U.S. drug store base following the $4.375 billion purchase of 1,932 Rite Aid stores.
In reporting its fiscal 2017 fourth-quarter and annual results on Wednesday, WBA said it expects to finalize the Rite Aid store acquisition — also including three distribution centers and related assets — next spring. By that time, ownership of the Rite Aid stores is slated to have passed to WBA.
“We’re delighted to be completing this transaction, which will extend our network, particularly in the Northeastern and Southern states,” WBA executive vice president and global chief financial officer George Fairweather told analysts in a conference call on Wednesday. “In the past week, we’ve acquired the first stores to confirm the operational readiness of the key Rite Aid transitional IT systems. We will then begin acquiring stores in phases, with completion anticipated in spring 2018.”
Integration of the Rite Aid stores — including rebranding to the Walgreens banner — is expected to cost about $750 million, which will be reported as acquisition-related expenses, WBA said. The company also is allocating about $500 million in capital expenditures for store conversions and other activities.
“To deliver the full benefit of the acquisition, we must of course fully integrate and rebrand the retained stores into the Walgreens network. This is a relatively complex, time-consuming and costly process. Initially, Rite Aid is providing transitional services for all acquired stores,” Fairweather said. “Over time, we will transfer these stores onto Walgreens’ existing IT systems prior to rebranding as Walgreens with our full retail offer. We expect to complete the integration of the acquired stores and related assets within the next three years.”
Besides broader geographical coverage for its retail store and pharmacy base, as well as increased brand visibility, WBA said it expects the Rite Aid asset sale to yield $300 million in annual synergies, fully realized within four years of the initial closing of the transaction and coming mainly from procurement, cost savings and other operational issues.
WBA said the store closings are part of a store location optimization program due to kick off in the spring. The stores earmarked for closure, published reports said, are mostly Rite Aid locations within a mile of a Walgreens store.
According to WBA, the program arose from a sweeping review of its overall U.S. store base in the wake of Federal Trade Commission approval of the Rite Aid asset purchase in September.
“Following regulatory clearance, we have been able to complete a comprehensive review of the combined store portfolio to determine the scope for optimizing locations. This has resulting in our decision to close approximately 600 stores and related assets over an 18-month period beginning in spring 2018,” Fairweather explained.
Pretax charges from the store optimization plan, on a GAAP basis, will total an estimated $450 million, mostly in cash, WBA reported. Cost savings from the program are forecast at about $300 million annually and are expected to be fully realized by the end of fiscal 2020, according to the company.
“In September, we saw in the U.S. our acquisition of assets from Rite Aid move from review to execution, a process that I will not deny took us far longer and was far more complicated than I had expected,” Stefano Pessina, executive chairman and chief executive of WBA, told analysts in the call.
“We were always optimistic that a deal could be structured in a way that would be acceptable to all parties,” Pessina said, alluding to the almost two-year antitrust review process that saw the transaction go from a proposed Walgreens-Rite Aid merger to a smaller asset sale. “While the deal we ended doing was very different from what we originally announced, it was not so very different from what I had originally envisioned. And now, I am pleased we are finally able to get on with the process of bringing these stores into our group and undertaking the next phase of review and transformation work within our U.S. network.”
