Turnaround plan hits full throttle

Turnaround plan hits full throttle – Longs Drug Stores

Doug Desjardins

Faced with growing competition from national drug store chains and supermarkets, Longs Drug Stores is embarking on a turnaround effort that began in earnest tow months ago with a shakeup in its management ranks.

The new tone for Longs was established in late February when president and chief executive officer Steve Roath resigned abruptly and was replaced by director Harold Somerset. Somerset, the former chief executive officer of the California and Hawaiian Sugar Co. and a Lon s board member since 1992, made it clear that things were going to change at the 437-store chain during a Feb. 27 conference call with analysts.

“I come into this job with one major expectation, which is that we will move Longs forward at an accelerated pace,” said Somerset, adding that the board “has not been satisfied with the company’s performance.” To that end, Somerset announced a list of new initiatives the board had adopted to improve the company’s performance. The list included making the supply chain more efficient, improving pharmacy profits, driving front-end sales and upgrading customer service and overall business.

While the specifics have not been delineated, the broad focus of Somerset’s to-do list suggests the chain is due for a major overhaul in the coming months as it battles to compete with such larger chain drug competitors as Walgreens, as well as mass merchants and supermarkets that are chipping away at its front-end sales.

On the surface, Longs appears to be doing well. For its fiscal year ended Jan. 31, the chain reported net income of $47.2 million, or $1.25 per share, corn pared with $44.9 million, or $1.19, in the prior year, fiscal 2001. Same-store sales increased 4 percent overall, and total sales hit $4.3 billion. Longs plans to open between 25 and 30 new stores this year.

But at least one industry insider saw problems lurking behind the numbers. Lehman Brothers analyst Meredith Adler said that while Longs reported earnings of $21.8 million for the fourth quarter of fiscal 2002, much of the upside was “due to a lower tax rate and an adjustment from prior quarters. Sales were weaker than expected and the operating margins deteriorated,” she noted. Adler also reduced her projected same-store sales increase for the current year from 4.3 percent to 2 percent. (The chain surpassed that estimate in March with a 6.9 percent same-store increase.)

Longs also signaled that it wanted to spark some changes to its business when it reshuffled some executives on its top management team. In late January, Longs senior vice president of pharmacy and business development Dan Wilson retired. He was succeeded by Bruce Schwallie, an executive from New York-based Duane Reade and formerly of Revco. The chain also brought in former Phar-Mor executive Todd Vasos to serve as senior vice president of marketing. He took over the responsibilities of Martin Bennett, who was reassigned as vice president of supply side management.

Then the chain made the most significant change Feb. 27 when Roath suddenly resigned as p resident and chief executive officer. The 60-year-old Roath, who joined the company in 1964 as a pharmacist, said that lea ding the company through its turnaround would have been impossible “given my retirement plans” but gave no indication of when he had planned to retire, leading some insiders to believe his resignation wasn’t completely voluntary.

Nonetheless, Longs is in or a busy year as it works to put its new initiatives into motion. The chain has already started its most daunting task, a restructuring and upgrading of its supply chain that will cost an estimated $55 million over the next four years. Longs recruited a company called Retek to install new software that will provide daily updates of sales and inventory.

“The supply chain issue has been addressed first because it’s designed to improve our business practices and enhance the use of automation across our business,” said Longs senior vice president and chief operating officer Terry Burnside. “We believe that’s our most direct route to equaling or bettering the performance of our competitors.”

Securities analyst Dave Rodgers of McDonald Investments in Cleveland agreed that up grading the supply chain will go a long way toward improving Longs’ fortunes. “It all comes down to the supply chain and getting into the practice of consolidating its buying instead of handling it at the store level,” said Rodgers. “It’s something they’re focused on right now, but they’re a long way from seeing any results.”

In addition to tracking sales of product in stores, Rodgers said the improvements would allow Longs to get rid of some antiquated practices that cost the chain money, such as store managers handling many purchasing decisions. “If they can pool t at store-level) buying together among a lot of stores, it would really improve their margins.

While pharmacy sales have remained fairly strong for Longs (an area the chain improved upon last year with the opening of an automated prescription-filling center), comparable sales have been in decline for more than a year. Longs hopes to find a solution by implementing more imaginative marketing and promotions that put more emphasis on a product area that’s been taken for granted.

“Our selection of Todd Vasos as senior vice president of marketing was based on his ability to come in and build a better plan for event selling, create buying opportunities and network with vendors, said Burnside. “We’ve got a big box [store concept] and Todd’s experience in big-box environments is being leveraged with some new sales ideas you’ll see us employ in the coming months.”

And by the end of the year, Longs will probably have recruited a new leader to spearhead its turnaround. Somerset said the search for a new chief executive officer will likely take from “three months to a year.”

Some analysts have suggested the company may hire someone from within its ranks, most likely Burnside, while others said Longs will probably bring in someone from the outside. “When you’re going through a lot of changes it helps to bring in a fresh perspective,” said Rodgers.

Though it’s facing an uphill battle and ever-increasing competition in its home state of California, one edge that the chain has over larger competitors is home-field advantage, since its stores have served many communities for more than 60 years. “We have an emotional bond with consumers that puts us in a really good place to build this differentiation,” said Somerset.

Longs interim chief executive officer also downplayed speculation among some analysts that the chain may soon merge with a larger player. “We’re convinced Longs has got an independent future,” Somerset said.

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Headquarters: Walnut Creek, Calif.

2001 sales: $4.3 billion

Percent change versus 2000: + 6.9 percent

No. of stores: 437

Average store size: 23,600 square feet

Pharmacy sales: $1.89 billion

Percent of sales from pharmacy: 40 percent

Source: Drug Store News research

COPYRIGHT 2002 Reproduced with permission of the copyright holder. Further reproduction or distribution is prohibited without permission.

COPYRIGHT 2002 Gale Group