Transformational Cost Management Program
On December 20, 2018, the Company announced a transformational cost management program that is expected to deliver in excess of $1.5 billion of annual cost savings by fiscal 2022 (the “Transformational Cost
Management Program”). As of the date of this report, the Company now expects to deliver in excess of
$1.8 billion of annual cost savings by fiscal 2022. The Transformational Cost Management Program, which is multi-faceted and includes divisional optimization initiatives, global smart spending, global smart organization and the transformation of the Company’s information technology (IT) capabilities, is designed to help the Company achieve increased cost efficiencies. To date, the Company has taken initial actions across all aspects of the Transformational Cost Management Program. The actions under the Transformational Cost Management Program focus on all reportable segments and the Company’s global functions. Divisional optimization within each of the Company’s segments includes activities such as optimization of stores which includes plans to close approximately 200 stores in the United Kingdom and approximately 200 locations in the United States.
The Company currently estimates that the Transformational Cost Management Program will result in cumulative pre-tax charges to its GAAP financial results of approximately $1.9 billion to $2.4 billion, of which $1.6 billion to $2.0 billion are expected to be recorded as exit and disposal activities.
Costs related to exit and disposal activities under the Transformational Cost Management Program, which were primarily recorded in selling, general and administrative expenses included in the fiscal year ended August 31, 2019 were as follows (in millions):
Twelve Months Ended August 31, 2019 Pharmacy USARetail
Retail Pharmacy
Lease obligations and other real estate costs $ 5 $ 19 $ 1 $ 25
Asset impairment1 95 67 98 260
Employee severance and business transition
costs 42 34 49 125
Information technology transformation and
other exit costs 5 10 7 22
Total pre-tax exit and disposal charges $147 $130 $154 $432
1 Primarily includes write down of leasehold improvements, certain software and inventory.
The changes in liabilities and assets related to the exit and disposal activities under Transformational Cost Management Program include the following (in millions):
Employee
Costs 125 260 25 22 432
Payments (69) — (8) (13) (90)
Other—non cash — (260) — (6) (265)
Currency translation adjustments 1 — — — 1
Balance at August 31, 2019 $ 57 $ — $17 $ 4 $ 78
Store Optimization Program
On October 24, 2017, the Company’s Board of Directors approved a plan to implement a program (the “Store Optimization Program”) to optimize store locations through the planned closure of approximately 600 stores and related assets within the Company’s Retail Pharmacy USA segment upon completion of the acquisition of certain stores and related assets from Rite Aid. As of the date of this report, the Company expects to close approximately 750 stores, of which the majority have been closed as part of this program. The actions under the Store
Optimization Program commenced in March 2018 and are expected to be complete by end of fiscal 2020.
The Company currently estimates that it will recognize cumulative pre-tax charges to its GAAP financial results of approximately $350 million, including costs associated with lease obligations and other real estate costs, employee severance and other exit costs. The Company expects to incur pre-tax charges of approximately
$160 million for lease obligations and other real estate costs and approximately $190 million for employee severance and other exit costs. The Company estimates that substantially all of these cumulative pre-tax charges will result in cash expenditures.
Since approval of the Store Optimization Program, the Company has recognized cumulative pre-tax charges to its financial results in accordance with GAAP totaling $296 million, which were primarily recorded within selling,
general and administrative expenses. These charges included $138 million related to lease obligations and other real estate costs and $158 million employee severance and other exit costs.
Costs related to the Store Optimization Program, which were primarily recorded in selling, general and administrative expenses for the Company’s Retail Pharmacy USA segment included in the fiscal years ended August 31, 2019 and 2018, are as follows (in millions):
2019 2018
Lease obligations and other real estate costs $ 119 $ 19
Employee severance and other exit costs 77 81
Total costs $ 196 $100
The changes in liabilities related to the Store Optimization Program for the fiscal years ended August 31, 2019 and 2018 include the following (in millions):
Lease obligations and other real
estate costs
Employee severance and
other exit costs Total
Balance at August 31, 2017 $ — $ — $ —
Costs 19 81 100
Payments (18) (60) (78)
Other—non cash1 307 — 307
Balance at August 31, 2018 $ 308 $ 21 $ 329
Costs 119 77 196
Payments (171) (69) (240)
Other—non cash1 152 (7) 144
Balance at August 31, 2019 $ 407 $ 22 $ 429
1 Primarily represents unfavorable lease liabilities from acquired Rite Aid stores.
Cost Transformation Program
On April 8, 2015, the Walgreens Boots Alliance Board of Directors approved a plan to implement a restructuring program (the “Cost Transformation Program”) as part of an initiative to reduce costs and increase operating efficiencies. The Cost Transformation Program implemented and built on the cost-reduction initiative previously announced by the Company on August 6, 2014 and included plans to close stores across the United States;
reorganize corporate and field operations; drive operating efficiencies; and streamline information technology and other functions. The actions under the Cost Transformation Program focused primarily on the Retail Pharmacy USA segment, but included activities from all segments. The Company completed the Cost Transformation Program in the fourth quarter of fiscal 2017.
The changes in liabilities related to the Cost Transformation Program include the following (in millions):
Currency translation adjustments — (1) (1)
Balance at August 31, 2018 $ 414 $ 7 $ 421
Payments (86) (4) (90)
Other—non cash 59 — 59
Balance at August 31, 2019 $ 387 $ 3 $ 390
Total costs by segment, which were primarily recorded in selling, general and administrative expenses included in the fiscal year ended August 31, 2017 are as follows (in millions):
Fiscal year ended 2017 Pharmacy USARetail
Retail Pharmacy
Asset impairments $272 $21 $ 2 $295
Real estate costs 372 — — 372
Severance and other business transition and exit
costs 87 46 35 168
Total costs $731 $67 $37 $835
Note 4. Leases
The following table is a summary of the future minimum lease payments as of August 31, 2019 (in millions):
Finance lease
Total minimum lease payments $311 $1,093 $32,268
1 Includes $1.6 billion of minimum rental commitments on closed locations
The capital and finance lease amounts include $683 million of imputed interest. Total minimum lease payments have not been reduced by minimum sublease rentals of $344 million due in the future under non-cancelable subleases.
The Company continuously evaluates its real estate portfolio in conjunction with its capital needs. Historically, the Company has entered into several sale-leaseback transactions. In fiscal 2019, proceeds from sale-leaseback transactions were not material. In fiscal 2018, the Company did not record any proceeds from sale-leaseback transactions. In fiscal 2017, the Company recorded proceeds from sale-leaseback transactions of $444 million.
In fiscal 2019, 2018 and 2017, the Company recorded charges of $185 million, $129 million and $394 million, respectively, for closed or relocated facilities. These charges are reported in selling, general and administrative expenses in the Consolidated Statements of Earnings.
The changes in liability for facility closings and related lease termination charges include the following (in millions):
2019 2018
Balance at beginning of period $ 964 $ 718
Provision for present value of non-cancelable lease payments on closed facilities 90 52
Changes in assumptions 56 19
Accretion expense 39 58
Other—non cash1 160 338
Cash payments, net of sublease income (316) (221)
Balance at end of period $ 993 $ 964
1 Primarily unfavorable lease liabilities from acquired Rite Aid stores.
Rental expense, which includes common area maintenance, insurance and taxes, where appropriate, was as follows (in millions):
2019 2018 2017
Minimum rentals $3,622 $3,447 $3,259
Contingent rentals 74 68 59
Less: sublease rental income (66) (67) (55)
$3,631 $3,448 $3,263