Tim Wentworth
Chief Executive Officer at Walgreens Boots Alliance
Thanks, Eric, and good morning, everyone. We've started the fiscal year by making progress against our financial and strategic priorities despite the challenging backdrop for our consumer. Our operating earnings in the period were driven by cost management initiatives and relative strength in our U.S. pharmacy services businesses, offsetting weakness in our front end retail business as we work to respond to changing consumer behavior.
Among the outcomes we achieved this quarter, in U.S. pharmacy, we maintained script market share, our international business continued to show strong returns, and our U.S. healthcare segment contributed somewhat above expectations on a combination of revenue growth and cost control. Importantly, we started to progress on the opportunities that we consider essential to our longer-term turnaround. At the end of fiscal 2024, we identified four areas of long-term focus and one quarter into the current financial year, we are executing against these targets.
Let me spend a few minutes walking you through each. The cornerstone of our turnaround is stabilizing the U.S. retail pharmacy business and we showed progress across several key planks of this plan. We've begun our footprint optimization program and are pleased with the early results. We're currently exceeding historical script retention rates and have retained the majority of store and pharmacy team members. We expect to significantly ramp the pace of our store closures from the first quarter level. As a reminder, we have a lot of experience with store closures, having closed about 2,000 locations over the past decade.
That said, to handle the stepped-up pace for the next three years, we've assembled a dedicated team to focus exclusively on the end-to-end process to improve upon our historical results. This team has already sequenced the next approximately 450 store closures, and at this point, we have a high degree of confidence in the execution of this process through the end of 2025. Naturally, we expect our future footprint to support stronger performance. Currently, we see comparable front end sales in our retained store fleet outperforming those stores slated to close this year by approximately 250 basis points and comparable pharmacy scripts by approximately 390 basis points. To be clear, even within our future footprint, we have to execute on our longer-term merchandising and consumer engagement initiatives in order to grow. However, this data supports our view that the smaller footprint will be a healthier one for our company.
Also critical to our retail turnaround is our employee experience. Across the enterprise, we are refining the way we forecast, allocate, and schedule labor in our stores. Beginning with about 200 stores this month, we're launching new scheduling optimization logic to better deliver on the in-store experience for our customers, patients, and team members. The solution deploys labor based on store-specific demand patterns, while also accounting for team member availability and preferences. We've received positive feedback from our initial pilot and are excited to roll this logic out to the chain later this year.
Winning in pharmacy requires superb operating leverage, so we are also taking steps to improve our pharmacy operations. You may remember at the start of last year, we talked about a pause in the rollout of our micro-fulfillment centers to optimize productivity and better engineer our patient and team member experience. This work has yielded successful results. Our MFCs currently serve about 4,800 stores, and shipped volumes from these centers are up 23% year-on-year, while cost to fill is down by 13%. These improvements allow our pharmacists to spend more time on patient care and clinical services, expanding the critical role they provide.
For example, stores supported by MFCs were able to administer more vaccines and complete more medication therapy management for our patients, payers, and B2B customers. Looking forward, there's still more work to do to expand this across our national footprint and further lower our operating costs on a per-script basis.
In addition to improving our pharmacy operating model, a key priority has been to reframe the reimbursement discussion with our partners to focus on fair value for our services. As an update to last quarter, we have now completed all of the contract negotiations for calendar 2025 and the nature of these conversations has evolved. We've had success in adjusting contract dynamics in our negotiations with our commercial Medicare and Medicaid plans, such as rebalancing brands and generics and carving out new categories for high-cost drugs, all in response to the evolving needs of customers and to better align reimbursement with our cost of goods.
We are also expanding discussions about being compensated for additional services beyond dispensing and promoting alternative payment models. Notwithstanding our progress, there's still much more that needs to be done over the next several years. Our goal is to serve as many patients and communities as possible, but this is dependent on being reimbursed fairly so that we can maintain our presence as a healthcare provider across the country.
It is also our goal to become a market leader in drug procurement. We are working to ensure that we are procuring drugs at the most competitive price and continue to engage with our partners at Cencora. We are making incremental progress in these discussions as we work towards a more acceptable long-term solution.
Turning now to our third priority, the turnaround of our consumer retail business. This has been made more challenging by the persistent deterioration in consumer discretionary spending. Our consumer remains under pressure from accumulated inflation and higher interest rates, and we are seeing continued value-seeking and channel-shifting behavior. Additionally, the warmer season impacted our first-quarter results with reduced respiratory incidences and the associated baskets with those trips, contributing to about half of our retail decline versus last year. As we look to effectuate a broader repositioning of our retail business, we're responding to these conditions in real time. Some of our actions, like recent changes in our targeted approach to managing store inventory, have been successful and our in-stock rate is the highest it's been in over four years. We are also modernizing the tools we use for assortment optimization to have the right item in the right store to create a customer-centric assortment.
We began to introduce new products as a part of our health and wellbeing-focused growth strategy, specifically in categories such as women's wellness, superfoods, and sports nutrition. We also continued to pursue own brand penetration, which is up 75 basis points in the first quarter, to 17.8%. Coming into this year we targeted introducing about 300 new own brand products and have introduced approximately 60 in the first quarter. As it relates to the evolution of our consumer experience, we are further leveraging our omnichannel capabilities such as home delivery and virtual care to meet evolving consumer preferences. Walgreens has offered same-day prescription delivery nationwide for more than three years and delivery within two hours from approximately 800 stores. We also offer virtual care in 30 states available to nearly 90% of the U.S. population. While we expect home delivery to continue to grow across retail and healthcare, we view it as one component of many touch points with our customers, including in-store, drive-thru, and online. In summary, we are progressing a number of elements of our retail strategy. While we are seeing early green shoots, we still have substantial work to do here
Turning to our non-core assets. We are underway with the sale process for Village Medical while continuing to evaluate the best options for Summit CityMD. We are encouraged by the leadership of new CEO, healthcare veteran, Jim Murray. To be clear, our ultimate intent to exit is unchanged, and we remain committed to redeploying any proceeds to reduce our net debt and improve the health of our balance sheet. Importantly, we improved free cash flow this quarter with decreased capital expenditures and higher adjusted operating income excluding the non-cash impacts of sale-leasebacks. Longer-term generation of positive cash flow remains a key priority for us in the context of litigation, opioid payments, debt, and our current dividend. Continued progress on cash flow will require meaningful action and focus.
In conclusion, we've shown progress on our priorities over the past quarter. And while we have a lot of work ahead of us, this progress underpins our belief in delivering a successful turnaround.
I will now turn it over to Manmohan to review our financial results.
