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Walgreens Adds More Stores to Fleet

The retailer unveiled a $438 million deal Thursday to buy USA Drug, a 144-store patchwork of regional chains.

For a chain that grew organically for most of its corporate history, Walgreen Co. is certainly catching up on acquisitions.

Just two weeks after agreeing to take a 45 percent stake in Alliance Boots for $6.7 billion, Walgreens unveiled a $438 million deal Thursday to buy USA Drug, a 144-store patchwork of regional chains.

In the past few years, Walgreens also acquired Duane Reade and fortified its online presence with the purchase of drugstore.com. Walgreens also picked up Happy Harry’s, a strong regional player, in 2006.

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The deal for USA Drug buys the company instant access to stores in the mid-Southern U.S. markets. The Little Rock-based firm operates in Arkansas, Kansas, Mississippi, Missouri, New Jersey, Oklahoma and Tennessee under the Super D Drug, May’s Drug, Med-X and Drug Warehouse nameplates.

Also on Thursday, Walgreens said June sales fell 6.8 percent to $5.63 billion with a 10 percent decline in comparable-store sales. Taking the news together, investors were modestly positive. Shares of the company rose 0.9 percent to $29.87. Mark Miller, an analyst at William Blair, said although the USA Drug deal was relatively small, the stores to be acquired are profitable and should be “modestly accretive to earnings per share in fiscal 2013.”

Industry sources said Walgreens needs to offset concerns surrounding the debt it took on to fund the Alliance Boots deal. “The long-term effect of the acquisition of Boots is good, but it creates a cloud over Walgreens which has never had debt,” said one industry observer. “In the grand scheme of things, the USA Drug acquisition is minuscule.”

The deal includes corporate offices, a distribution center located in Pine Bluff, Ark., and a wholesale and private brand business. “This acquisition expands our business in an important region of the country,” said Walgreens president and chief executive officer Greg Wasson. “It will provide significant new pharmacy business for us in this region while also enabling us to bring the Walgreens experience to many additional smaller communities where USA Drug has developed strong operational expertise.”

The chain is owned by Stephen L. LaFrance Holdings Inc. and members of the LaFrance family.

“Under our ownership, customer service is what separates us from the competition and I know Walgreens can follow through,” Stephen LaFrance, chairman and owner of Stephen L. LaFrance Holdings, told WWD. “We have stores that can support large cosmetics and we have some smaller stores that are mostly apothecary.

“I will only be involved for 60 days,” he said. “The timing was right because my wife and children want me to cash out. I do believe, however, there is room for strong regional chains and that they can survive against the big chains.”

The company, which had sales of $825 million last year, grew from a Pine Bluff store LaFrance opened in 1968.

Walgreens said “decisions will be made over time” about how to “harmonize” the brands. With the exception of Duane Reade, Walgreens tends to rebrand acquired stores under its own nameplate. The USA Drug distribution center as well as its private label production could ultimately be sold off. “They bought market saturation,” said one source.

Some of the acquired chains are strong in the cosmetics business; others have a concentration on pharmacy. This purchase along with the stake in Boots could put greater strain on smaller beauty vendors. Walgreens is expected to add Boots products to all of its doors. “So let’s say you are adding three feet of Boots — some vendor has to go and it won’t be Procter & Gamble or L’Oréal,” said one seasoned industry executive. “Little brands on the wall could risk going away.”