"We have significant capital reductions that we're making without impacting the underlying business in a meaningful way and cost reductions," Wentworth explains. "So there's that piece of it, but that really frees up the capital then to do the investment, in not only in the stores and in additional services in the stores, but importantly the broader health services portfolio. What you've seen this year there is what I would say getting to profitability — we are recovering almost $400 million of incremental profitability..."
Wentworth also comments on the outlook for pharmacy services and the likelihood of vertical integration prospects.
But secondly then is, really importantly, get the balance sheet and the cash position of the company squared away. So you saw we cut the dividend, for example. That was a difficult decision but necessary. We have significant capital reductions that we're making without impacting the underlying business in a meaningful way, and cost reductions. So there's that piece of it, but that really frees up the capital then to do the investment, not only in the stores and in additional services in the stores, but importantly, the broader health services portfolio.
And what you've seen this year there is, what I would say, getting to profitability. We're recovering almost $400 million of incremental profitability, largely a reduction of losses from a couple of the key assets. And so that's the other piece this year, is not only stabilizing that, but really helping our shareholders as well as the consumer understand, we are not pivoting away from the stores to a health care strategy, which has been somewhat the narrative. Rather, we are starting with great stores and expanding out from there a set of services that we can do across the health care ecosystem for payers.
ANJALEE KHEMLANI: Well, talk to me about that, because we know the stock has been down over the past year. You've had a lot of struggles in the retail space, many different factors. And generally speaking, I know at least in my years covering Walgreens, the front of store has always been sort of a weaker, sort of an up and down situation. So how are you trying to change the strategy to address all that?
TIM WENTWORTH: Sure. I talked about everything being on the table. There are a number of elements when you talk about the store. There's how many stores do we have. So if you look at historically, we've closed a couple of thousand stores since the last five years, 200 more this year. And we're looking forward at what the right footprint is for the future.
Secondly, the layout of the stores and how much we dedicate to health care versus to other retail activities. Third is the mix and the number of SKUs in the stores. So that's all on the table. I think we can meaningfully reduce the number of SKUs. It means we're going to work with fewer national brands, but we're going to be more important to the ones we work with.
And then own label, which to me is way under leveraged compared to the trust we build with our consumers. And being able to get own label, which has been-- it's gone up over the last couple of years, but I'd like to double own label. You can see other retailers that do a good job with own label do quite well, and the consumers find it absolutely acceptable. So those are the pieces.
And then, finally, turn the store managers loose. I think the thing that's really exciting is we have 9,000 store managers. And getting them the information and, frankly, rearranging their incentives so that their store and their employee eNPS and their customer eNPS are how they get their variable comp will unleash a whole bunch of innovation, giving them some flexibility to make their stores even more successful.
ANJALEE KHEMLANI: A quick yes or no on that. Does that same label-- own label also include getting into the biosimilar space? Are you looking to do that level or no?
TIM WENTWORTH: No. We're happy. The manufacturers of biosimilars, we're going to be a great partner for them as those products ultimately find market acceptance. But, no, we're not going to-- I don't think you'll see us building manufacturing capability.
ANJALEE KHEMLANI: Well, I'm interested by this retail focus because it seems to be that when you were appointed, people assumed that you might be getting into the insurance space, more vertical integration. But I get the sense that you're not necessarily a fan of vertical integration, of VillageMD, even, and just being a part of that strategy.
TIM WENTWORTH: Vertical integration can take a lot of forms and works really well for certain players and has worked well for players. Given where we are, it's not for us the best option compared to building out a health services strategy that is asset light, by and large, highly capital efficient, and enables the touchpoints that we have with 10 million consumers a day to be used as touchpoints for other outcomes that matter in health care. Everybody at this conference would love to have 10 million touchpoints a day with patients, right?
ANJALEE KHEMLANI: Sure.
TIM WENTWORTH: And so as we sit down with health plans, they get super excited. So we don't need to own a health plan, frankly, in order to create value for that health plan and be paid fairly for it. That's the same as the PBMs who we do a lot of different services for in some cases. We don't need to own it in order to actually be the most valued and trusted partner.
ANJALEE KHEMLANI: So is this something where you would consider cutting VillageMD out of the equation?
TIM WENTWORTH: Well, that's-- I've said everything is on the table. So first I have to say everything is on the table. But let me say, actually, VillageMD is performing really well. They clearly needed to do a reset this year, and that's what they're doing very, very, very well. We view them as an investor, because we are an investor in them. We actually hold some of their debt, so we also are their banker. But most importantly, for me, is they are a place for us to build services collaboratively that helps them achieve their goals and that we can then prove out and then help others with as well.
So I actually like our relationship with VillageMD, but you will not see us adding to that set of investments with additional provider groups beyond VillageMD, Summit, CityMD. We're very happy that that's-- we have what we need in that respect to build solutions that can be taken out to the marketplace.
ANJALEE KHEMLANI: Well, talking about the strategy scripts, of course, and volume is always one of the metrics that are used to judge the company. We've seen a lot of different changes in the past several years thanks to the pandemic-- a lot of digital focus, mail order has gone up. And we just heard one company say that they're going direct to consumer. I'm speaking about Eli Lilly. Going directly to consumer-- do you feel like that strategy bypasses or threatens the pharmacy industry in any way?
TIM WENTWORTH: I mean, a lot of it will depend on how it plays out. But what I would say in a general sense is not necessarily. When I look at the announcement that I know Lilly made-- and there's a lot of details still to be forthcoming, right? And I have a huge amount of respect both for the products they're putting in there as well as the process they're implying. I actually think they'll ultimately conclude they want a retail partner to work with.
And so what you'll have-- and if you think about it, it's a very, by and large, right now, a very large cash program. And what we've seen is the cash programs have proliferated because of this kind of historic cross-subsidization of brands and generics, where the generics for a patient in a high-deductible plan were costing them more in their insured benefit than if they just walked in and paid cash. Well, there was a rational reason in the history that was the case. It looks less rational now.
And the GOPs are a great example where, quite frankly, it doesn't work for us or, frankly, the ecosystem for us to not be paid at least what they cost for us to acquire plus the services to help those patients. And so I think you're going to see a continued evolution that helps the pharma company get the drug to the patient, have it be safe, have it be taken as it should be. And as you know, that class of drugs, adherence is a major problem. And I think we can demonstrate how we are a much stronger adherence engine, for example, than a mail-order pharmacy.
ANJALEE KHEMLANI: Fair enough. And then when you're talking about where the company gets to go from here, what the growth strategy looks like-- you're talking about locations and storefronts, brick and mortar, all the changes that you anticipate in the services that are being offered-- what is it that you would say is the key goal, the key focus that Walgreens needs to stay on in order to ensure that the story that has been its story for some time now isn't going to continue forward, that you are able to, in this tough environment, actually get the growth that you're anticipating?
TIM WENTWORTH: Yeah, I think what you'll see-- the kind of metrics that I'm going to be looking at is, how many new contracts have we signed with large payers to do unique things? It's going to be, how many pharma companies are now paying us to actually help recruit for their trials, because we've signed 25 contracts. We have a very large one that we're looking down the barrel of. And these contracts are actually, in some cases, multiyear, double-digit, million-dollar contracts. They are significant.
And so, again, what I'm going to be looking for is, ultimately, do the customers in the marketplace-- not the patients, but the customers, the health plans, health systems, PBMs and pharmacies, and the pharma companies. Are we winning with them, and do we have announceable, reportable things that are material to the business and don't require massive amounts of capital in order to bring them to life?
ANJALEE KHEMLANI: Well, we'll have to leave it there. But thank you so much, Tim Wentworth, new CEO of Walgreens. Thank you for joining us today.
TIM WENTWORTH: Thanks, Anjalee, appreciate it.
ANJALEE KHEMLANI: Don't go anywhere. Yahoo Finance Live will be right back.
