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Walgreens to close 200 U.S. drugstores in bid to propel profits

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(Bloomberg) — Walgreens Boots Alliance Inc. will close 200 of its 8,232 U.S. drugstores to reduce costs as its profits get squeezed by competition and by lower reimbursements from pharmaceutical insurers.

The company will also reorganize corporate and field operations and revamp its technology, which along with the store closings will help cut an additional $500 million in costs by the end of fiscal 2017. That would extend a $1 billion cost-cutting initiative announced in August.

Investors cheered the plans and the company’s quarterly earnings report, which beat analysts’ estimates. Walgreens Boots shares climbed 3 percent to $90.30 in early trading. Through Wednesday, they had increased 15 percent this year.

Interim Chief Executive Officer Stefano Pessina is seeking to keep expenses in check as he works on a long-term plan to revamp the U.S. drugstores, forging them in the mold of the more stylish Boots stores in Europe. While Walgreens forecast profit for its current fiscal year that may trail analysts’ estimates, it maintained its projection for fiscal 2016 earnings, indicating the results it expects its cost-cutting measures to yield.

Pessina, who’s also the company’s largest shareholder, has replaced executives and telegraphed his interest in U.S. deals. Rite Aid Corp. (NYSE:RAD) is seen as a possible target, Peter Drippe of Visium Asset Management LP, said earlier this month.

Excluding certain items, fiscal 2015 profit will be $3.45 to $3.65 a share for the 2015 fiscal year, Walgreens said Thursday in a statement. Analysts had estimated $3.60 on average, according to data compiled by Bloomberg. Adjusted earnings will rise to $4.25 to $4.60 a share in fiscal 2016, said the company, based in Deerfield, Ill.

The cost-cutting plans will lead to charges of $1.6 billion to $1.8 billion before taxes, to be recorded over time.

Quarterly results

Profit, excluding certain items, for the quarter that ended Feb. 28 was $1.18 a share. Analysts had estimated 95 cents on average, according to data compiled by Bloomberg. Revenue for the quarter was $26.6 billion. Analysts had predicted $27.6 billion.

Thanks in part to the effects of the Patient Protection and Affordable Care Act (PPACA) Medicaid expansion program on demand, same-store sales for the U.S. retail pharmacy unit grew 6.9 percent from the retail pharmacy division in the U.S. Retail sales, leaving out pharmacy revenue, rose 2.5 percent in comparable stores, highlighting the challenge Pessina faces in reigniting growth.

In addition to its rivalries with CVS Health Corp. (NYSE:CVS) and Rite Aid, Walgreens faces competition from mail-order pharmacies and from companies like Inc. that are speeding up delivery times for online orders of household goods.

While pharmacy sales in the U.S. rose 10 percent from a year earlier, prices for drugs have been on the rise, cutting into profits because Walgreens hasn’t been able to get health insurers to increase their reimbursements as quickly.

CEO hunt

The company is making progress in its hunt for a new CEO, it said, without offering details. Former CEO Greg Wasson announced his retirement in December.

Rite Aid, which reported earnings on Wednesday, forecast full-year profit of as much as 27 cents a share. Analysts had estimated 43 cents on average, according to data compiled by Bloomberg.