Rick Hans - Divisional VP of IR and Finance Greg Wasson - President and CEO Wade Miquelon - EVP and CFO Kermit Crawford - President of Pharmacy Services

Mark Miller - William Blair Scott Mushkin - Jefferies & Co Ed Kelly - Credit Suisse Eric Bosshard - Cleveland Research Company Deborah Weinswig – Citi Robert Willoughby - Bank of America-Merrill Lynch Tom Gallucci - Lazard Capital Markets Andrew Wolf - BB&T Capital Markets Ann Hynes - Caris & Company

Welcome to our fourth quarter and fiscal 2010 year-end conference call. Today, Greg Wasson, our President and CEO will discuss the quarter and fiscal year highlights and our continued progress in executing our core strategies.

In addition, Wade Miquelon, Executive Vice President and Chief Financial Officer, will detail our fourth quarter and fiscal year financial results. Also joining us on the call, and available for questions is Kermit Crawford, our President of Pharmacy Services.

When we get to your questions, please limit yourself to one. As a reminder, today's presentation includes certain non-GAAP financial measures, and I would direct you to our website at investor.walgreens.com for the reconciliations.

Also, I am available throughout the day by phone to answer any additional questions you may have. You can find a link to our webcast under our Investor Relations website.

After the call, this presentation will be archived on our website for 12 months. We're also making the call available as a podcast.

You can download that too at our Investor Relations website. Certain statements and projections of future results made in this presentation constitute forward-looking information that is based on current market, competitive and regulatory expectations that involve risk and uncertainty.

Please see our latest Forms 10-K and 10-Q for a discussion of risk factors as they relate to forward-looking statements. Now I'll turn the call over to Greg.

Thank you, Rick, and thank you everyone for joining us on our call this morning. Today I want to cover three main points; first, our fourth quarter and year-end results; second, I'll discuss the initiatives we have underway to improve front-end sales through our Customer-Centric Retailing Initiative; and three, I'll highlight the industry-leading effort we are making to provide our customers with convenient access to flu immunizations as we continue to transform community pharmacy.

As you saw from our press release this morning, we reported record sales of $16.9 billion in the quarter, which is a 7.4% increase over last year. Fourth quarter net earnings per diluted share increased 11.4% to $0.49, which includes $0.05 per share in acquisition and restructuring-related costs that compares with $0.44 in the same quarter a year ago, including $0.03 per diluted share and restructuring-related costs.

This quarter we generated record cash flow from operations of $925 million, an increase of 8.6%. Net sales for fiscal year 2010 grew 6.4% to a record $67.4 billion and net earnings per diluted share were up 5% to $2.12.

Cash flow from operations in fiscal 2010 totaled $3.7 billion, and free cash flow was a record $2.7 billion. Looking back on fiscal 2010 I feel very good with the number of significant milestones we have achieved.

We filled a record 778 million prescriptions, up 7.5% from last year, and our retail pharmacy market share has increased 60 basis points from a year ago to 19.5%. We administered more than 7 million seasonal and H1N1 flu shots or more than any other retailer.

We opened 291 net new drug stores. We acquired Duane Reade's 258 drugstores, the largest acquisition in our company's history which gives us a leading drugstore position in the New York metro area.

We converted or opened more than 1500 stores to our Customer-Centric Retailing or CCR format. Beer and Wine was added as part of our selection to more than 3,500 stores in fiscal year SG&A growth, adjusted for restructuring cost and the Duane Reade acquisition fell to 6.5%, its lowest level in decades.

And Wade will provide more details on the quarter's SG&A growth a little later. And finally, we returned $2.2 billion to our shareholders through dividends and share repurchases in fiscal 2010.

And in September, we completed the $2 billion share repurchase program we announced in October 2009. So I take great pride in our team's operating execution this past year.

Their efforts give me great confidence that we will continue to drive our core strategies in 2011. We'll continue to slow store openings with a goal of 2.5% to 3% this fiscal year.

Our effort to enhance the customer experience will continue to gain momentum with the acceleration in the CCR store refreshes, and we plan for our cost reduction and productivity efforts to provide $1 billion in savings in fiscal 2011 versus our base year of 2008. As you can see the impact of these saving efforts when looking at the progress we've made in SG&A dollar growth the last few years.

This chart shows how generic drug introductions produced peaks and valleys in gross profit dollar growth during much of the decade, hitting a high point in 2007 before reaching a low in 2009. I addition we felt the effects of the slowing economy beginning in the first quarter of fiscal 2009, which further negatively impacted gross profit dollar growth.

As you can see, unfortunately we have had periods when SG&A dollar growth exceeded gross profit dollar growth. However, excluding the impact of Duane Reade and restructuring cost, SG&A dollar growth slowed in the last two years.

That resulted from the Rewiring for Growth initiative, scaling back on new store openings, and progress from other cost savings initiatives. Today, we are in a much better position to manage SG&A dollar growth in relation to gross profit dollar growth.

And it's worth noting that in the latest quarter, despite the economy's impact on gross profit dollar growth we were able to increase those dollars faster than SG&A. Now I'd like to provide an update on CCR and how it's driving improvements to our front-end.

As I talked about previously, CCR is reducing working capital and store labor. And most importantly, it is improving sales and the overall shopping experience by optimizing and enhancing our existing product assortment by improving category and product adjacencies through improving site lines throughout the store, and by refreshing all our stores with a new in store décor package.

As a reminder, we have about 5,500 out of our 7,500 stores targeted for CCR refreshes. As the end of the third quarter, we have opened or converted more than 500 additional stores, the CCR bringing our total number to more than 1,800.

By the end of calendar 2010, we'll have over 2,000 CCR stores. Our rollout of beer and wine has now reached nearly 4,200 stores.

And we expect to have more than 5,000 stores by the end of the calendar year. Our customers find this selection a convenient way to consolidate their shopping trips and it builds basket size.

This extensive refresh of our stores is being accomplished at an average cost of $50,000 per store. And I'm very encouraged by the favorable customer response these stores are receiving and the improved performance we're seeing from this investment.

In fact, the overall performance of our CCR pilot stores is getting better and better as we continue our refinement. On our last conference call we showed you the pilot store's performance measured by our four product classes versus a control group of store.

For the 26 week period and in May 29, our pilot stores outperformed the control stores during that period by 2.6% across all product classes. In the latest 26 week period and in August 28, our pilot stores outperformed the control group overall by an even better 3.7%.

The improvements that we're making, including new product adjacencies, new assortments in merchandise and the in store décor package; all are consolidated into our results. Now, let's update results from our wave one and wave two CCR rollouts.

As you know after we launched our pilot stores in spring 2009, we rolled out wave one of CCR to all stores in the Dallas and Houston markets. These two markets have faced unique economic factors impacting their comparisons to non-CCR stores in other markets, therefore we're focusing on our market share in Dallas and Houston.

Our latest reports for these two markets show that we are maintaining our market share across our top 60 categories versus our food, drug and mass market competitors. We're also encouraged by the improving sales results we're seeing in both markets.

In addition, these stores will get a lift from the new in store décor package they received during the fourth quarter. Next, our wave two stores which consist of 203 locations are outperforming our non-CCR stores in the 13 weeks after their conversion.

CCR continues to gain momentum and we fully expect it to contribute to front end sales as we complete it's rollout by calendar 2011. I'd like to cover my last major topic; this year is flu season.

Let's start by reviewing last year's monthly sales comps. It's easy to see that script growth and front end sales reacted very strongly to the early flu season.

Both benefited from customers coming to stores to get immunized and for the prevalence of H1N1. Meanwhile, the rest of the year showed more normal trends with front end comps generally improving since December.

In the fourth quarter our margins also improved and we saw increases in comp store market share for our top 60 categories. Here, you see the incidence of cough, cold and flu throughout last ear.

It was the early onset of flu activity that caused our first quarter spike in comp sales. In particular, script counts, including flu shots, peaked by the end of September.

And by November, we administered nearly all the seasonal flu vaccine we had. And we believe we could have administered many more doses had we not run out of vaccine.

As a result for the rest of the season, we administered H1N1 vaccinations and finished up the program by February. As I mentioned, we easily surpassed our goal and provided over seven million total shots.

With this graph, you see how unusual cough and cold and flu incidence was when comparing it to the two previous years. It's more typical for the incidence of flu to peak around February, which is what happened in the two seasons prior to last year.

If this year's flu season is typical, we have from late August to early January to provide flu shots before the flu peaks. Now, I'd like to highlight some of the key differences in this year's flu season from last.

First, customers only need to get one flu shot this year that will cover both the seasonal and the H1 in one flu strains. The centers for disease control and prevention now recommends everyone over six months of age get a flu shot versus an emphasis in past years on seniors and those with compromised immune systems.

And third manufacturers made over 40 million more doses this year. So of course we can't predict the timing or the intensity of this season's flu activity, but we are ready with an unprecedented effort to deliver as many as 15 million flu shots to our customers.

We now have more that 26,000 certified immunizing pharmacists and nurse practitioners compared with 16,000 at the start of last years flu season which is why we are offering flu shots all day everyday this year versus the limited hours last year. Importantly, we have a new medical billion option through several health plans, including national agreements with United Healthcare and Cigna and regionally we offer it for Blue Cross and Blue Shield of Illinois and North Carolina among others.

In addition, we made it easier for our staff to handle the administrative for flu shots by streamlining the process. And in terms of marketing, we sent direct mail pieces with pre-populated flu shot forms and ramped up our online and T.V.

advertising, including a partnership with the ever popular Dr. Oz.

With all these efforts in action, we have already provided more than 2 million flu shots through yesterday. And remember, as I pointed out earlier, that typical peak of cough and cold and flu incidence it's still more than four months away.

In closing, we believe our flu shot program is a great example of how close we are to patients and how easily we can reach them. That's what health plans and other payers are saying they need from us, face-to-face access to improve patient outcomes and provide preventative care.

We're doing that with our 25,000 certified immunizing pharmacists, more than 1,000 nurse practitioners and 7,500 pharmacies located within five miles of nearly 75% of the population. We've heard very clearly from payers how important we are to their network of providers.

Now one else can match our base of retail pharmacy locations, hospital and medical pharmacies, worksite health centers and retail clinics and specialty and infusion pharmacy centers. We have the reach and capability to help payers lower their total healthcare costs while improving quality in clinical outcomes through our complete Pharmacy Health and Wellness solutions.

As we begin fiscal 2011, we are positioning our company to serve as a true community-based retail, health and daily living destination. Towards that end we have recently named Mark Wagner, previously our Executive Vice President of Community Management and Operations to the new position of President of our Community Management Division.

Also Kermit Crawford, who is our Executive Vise President of Pharmacy has been named to the new position of President of our Pharmacy Services division. These moves and other realignment will result in improved execution through out the chain and strengthen the alignment of initiatives across the organization.

Before I close, I want to say I am very optimistic about our company's future. I also want to thank all of our employees for the tremendous execution over the past year, and what I know they can accomplish in the upcoming year.

Now, we'll turn the call over to Wade who will update you on financial results in the quarter and the year.

Let's review the quarter's result in more detail. Greg covered sales and earnings, so let me skip down to prescription sales which grows 6.5% and represented 66% of sales for the quarter.

We filled 194 million prescriptions an increase of 6.7% from a year ago. And that includes the benefit of 0.8 percentage points for patients filling 90 day versus 30 day scripts.

On a comp store base, the number of prescriptions filled increased 3.3% and that includes a benefit of 1.2 percentage points from 90 day scripts. Prescription sales in comp stores rose 1.6%.

Frond end comp sales in the quarter were up 1.2% in spite of a slow demand for discretionary goods. Total comp store sales were up 1.5%.

For fiscal year 2010, again I will focus on sales number on this chart. Prescription sales rose 6.3% and represented to 63.2% of sales for the year.

We filled 778 million prescriptions, an increase of 7.5% from last year. And that includes the benefit of 0.8 percentage points from patients filling 90 day versus 30 day scripts.

On a comp store basis, the number of prescriptions filled increased 4.5%, and that includes a benefit of 1.2 percentage point from 90 day scripts. Prescription sales in comp stores grow 2.3%.

Front end comp store sales were up 0.5% for the fiscal year, while total comp store sales increased 1.6%. Compared to the industry our sales continue to perform well.

In viewing a true apples to apples time period that compares our front end comps to the top three competitors based on their most recent quarterly reporting, we are outperforming two of the three as shown in this chart. And we were only 40 basis points below the third competitor.

Turning to gross profit, the margin improves 70 basis points in the quarter. Front end margins benefited from pricing, promotion and other improved efficiencies as well as lower rewiring for growth expanses.

On our pharmacy side, margins benefited from new generic introductions, partially offset by reimbursement. Gross profit dollars grew by $1.4 billion in fiscal 2010, and we view that as an especially strong performance in the face of several headwinds during the year such as the economy, which we estimate slowed comparable store sales by two to three percentage points that's equivalent of about $500 million gross profit impact.

Other headwinds include pharmacy reimbursement, such a new AWP definition for Medicaid prescriptions and a slowdown in the rate of new generic introductions among others. And combined, we estimate those factors were about $1 billion headwind over the course of the year.

In spite of this, we grew gross profit dollars faster than SG&A dollars in the quarter, excluding restructuring costs and Duane Reade. The two years net SG&A dollar growth was higher this year compared with a year ago primarily due to costs associated with the Duane Reade acquisition.

And when we adjust for the acquisition and restructuring related factors, you will see the two-year stat drops to 12.1% versus a 14.1% two-year stat a year-ago to 23.4% stat two years ago. Although SG&A continued to trend down, it gets a little tougher each quarter to maintain the same rate of reduction as we lapse significant progress made over the previous periods.

As we get to core SG&A growth, let me walk you through the adjustments for the quarter. Our reported increase in SG&A dollar growth was 11%.

As you can see, Duane Reade's acquisition-related cost and operating SG&A, slightly offset by the impact in the quarter of Rewired costs contributed five percentage points of total SG&A dollar growth. In addition, new store openings contributed 3.8 percentage points to SG&A dollar growth.

Remaining SG&A dollar growth was a combination of inflation, acquisitions, and business mix, including strategic investments and CCR conversions. We achieved a net benefit of $615 million for Rewired for Growth in fiscal 2010 versus our goal of $500 million.

That's primarily a result of moving some cost to the program into fiscal 2011, and for some benefits arriving earlier than expected. Therefore, we are expecting an additional $400 million in net benefit in fiscal 2011 because we remain on track to reach our goal of $1 billion in savings in the current fiscal year.

The chart summarizes the EPS impact of Rewired savings and costs for restructuring this last year's fourth quarter. The net savings in the quarter was $0.08 per diluted share.

Again, you will see that restructuring benefits are slightly ahead of schedule with the cumulative savings by quarter at $0.16 per share and the run rate over the 2008 base year at $0.46 per share. Now let's review some additional income statement details.

The LIFO provision was $61 million versus $48 million in the fourth quarter of 2009, and that represents a LIFO provision of 1.7% for the year as we experienced inflation in the pharmacy, slightly offset by a slight deflation on the front-end. We plan for the LIFO provision to be 1.5% in fiscal 2011.

Total Rewire expenses this quarter were $19 million, and for the fiscal year they totaled $106 million. The effective tax rate in the fourth quarter was 35.6% compared with a tax rate of 35.8% in the year-ago period, and we are planning for a tax rate of approximately 37% in fiscal 2011.

Accounts receivable, inventory, and accounts payable are the components of working capital that we can most directly impact, and the net sum of these as a percent of sales fell 1.9% in the quarter compared with a year ago. Total FIFO inventories rose 9.1% against total sales growth of 7.4% and total store growth of 8.1% including Duane Reade.

FIFO total inventories on a per store basis increased 0.9% in the fourth quarter, and this small increase comes after an 11.1% decrease in the year-ago period. To update you on capital expenditures, CapEx for fiscal 2010 was $1.0 billion short of our original estimate.

That was primarily due to a strategic decision to delay the investment of our new point-of-sale system and other IT investments and the timing of certain real estate investments. We expect CapEx to increase in fiscal 2011 to approximately $1.4 billion as we now move ahead on our point-of-sale system rollout and other key investments.

Cash flow from operations for the fiscal year was $3.7 billion, just slightly short of last year's record of $4.1 billion. Free cash flow increased to $2.7 billion in the fiscal year, versus $2.2 billion for the same period last year.

Cash and cash equivalents and short term investments totaled $1.9 billion, and long term debt totaled $2.4 billion. Our strong cash flow and balance sheet allowed us to pay out $541 million in dividends during the fiscal year, an increase of 21.3% over fiscal 2009.

Our fiscal 2010 dividend payout ratio was 26%. And you will recall that we had previously set a long term dividend payout target of between 30% and 35% of net earnings.

During the year, we repurchased $1.6 billion in stock. Combined with our dividend payouts, we returned a record $2.2 billion to shareholders in fiscal 2010.

And I'm very proud to report, this month we have completed the $2 billion stock repurchase plan that we announced in October 2009 three years ahead of schedule. As we consider future use of the cash, we will keep following our four basic guidelines.

First, we'll maintain a strong balance sheet and financial flexibility. Next, we'll continue to reinvest in our core strategies.

Third, we'll invest in strategic opportunities that reinforce our core strategies and meet our return requirements. And last, but importantly, we will return cash to shareholders from surplus cash flow in the form of dividends and share repurchases over the long term.

This policy demonstrates our ongoing commitment to delivering value to our shareholders. Now I'd like to briefly conclude by saying that we remain very optimistic about our company's future as we continue down the path of smart growth, with an emphasis on the customer and cost and productivity gains.

I want to thank all of you for your support. We are very proud to have returned a record amount of cash to our shareholders in fiscal 2010, especially in this difficult economic environment.

Now I'll turn the call back over to Rick.

Thank you, Wade. Ladies and gentlemen, that concludes our prepared remarks.

We are now ready to take questions.

My one question is going to be on gross margins. Can you describe the change from last period?

I know the generics moved up through the quarter, but it's hard to see that that would have explained fully the change in trend. And so, without any guidance going forward it's very tough to get the quarters right.

Can you tell us what might have been unique to this quarter? What here is recurring?

And then if you can give us some sense for how you are planning expenses in fiscal '11? Do you think gross profits grow at least in line with sales or less than sales?

Thanks.

I guess the things I would say is, first as gross profit goes, you know we are up nicely this quarter and a couple of factors that played into it. First, from the front-end we are up nicely, which was a combination of many things; it was more effective pricing promotions, more effective plus markdowns, better buying, lots of different factors, but we feel very good about the directionality of the gross profit in the front end.

If you look at the pharmacy, basically we had some help from generics in this quarter. As you know, in prior quarters we've had some lags, but we had some help from generics.

And that helped to offset some of the underlying reimbursement pressure. And we've also had some positive efforts from reimbursements as well.

So that was effectively a mixed bag there. Going forward, what I'd really say is that our team model overtime and again understand quarter-to-quarter there can be some volatility.

But what you should be seeing overtime is our continued effort to focus on gross profit dollars. And to make sure that those gross profit dollars overtime are able to outrun our SG&A.

And we feel pretty confident we can do that. But that's really the model that we're focusing on.

So I was wondering if you could just give us some thoughts about SG&A dollar growth as we go into next year. I mean are we going to see that continue to be less than sales or is it going to be more than sales?

And how is the CCR program going to fit into that.

I'll jump and let Wade kind of tag along a little bit. But our goal was obviously to keep our SG&A dollar growth trending down.

We feel good with where we've been over the last quarter or two. And our bigger goal was frankly to make sure that just SG&A dollar growth is less than gross profit dollar growth.

So I think we feel good with where we are with rewiring. We're going to deliver the $1 billion that we had set out by the end of 2011.

I think we'll continue to see some improvement from the slowing down of new store openings that we called down actually on this call. And we really got some good focus across the entire organization on just cost control.

We got a relentless focus on cost. So I think what we could say is we're focused on continuing to drive that trend down and keep it less that gp dollar growth.

Wade, are you going to add anything?

No I think Greg said it all, I think we've done a good job of bringing it down. You know you've got some reconciling items.

So you can see it when you take out things like new store openings and others. We're making real progress.

We feel very confident in our Rewire for Growth uptick from year to year. And beyond that, we put a significant amount of effort into looking at how we do kind of continual reengineering process improvement so that it's really an ongoing process of improving things versus getting to one time.

So again, we've focused on driving gross profit dollars up and trying to drive SG&A dollars below that. And I think we feel very good about all the good initiatives and interventions we put in place.

So just two quick clarifications and I'll give up the floor. First, was there any one-time payment in that gross margin number you reported in the fourth quarter which was quite strong?

That's question number one. And number two is; when you give the order weight of what you are going to do with your cash, it seems like the shareholder is number four.

Should we think of it as number four or is this just the way you kind of present it?

The first one, there is no one-time payment or at least nothing substantive or material; there is nothing I can even think of in that number that was true operating performance. And the second one, I would say because it's number four, it doesn't mean it's number four priority.

I view these almost as a balanced matrix. We are not going to compromise a strong balance sheet, but we're also not going to focus on returning cash to shareholders.

Is that the fundamental question?

I just want to start with maybe a follow up. On the gross margin side, Wade, it sounds like you're clearly encouraged by what you're seeing on the front end?

Is there going to be follow through on that now, through 2011? Is that how we should be reading how you answered that question?

Look, I would say I think the store ops and merchandising folks and marketing folks are doing a terrific job. We're focusing on all levers.

Right, we've got a lot of good initiatives and plays. The CCR initiative is working and it continues to improve.

The various subsets, things like beer and wine are working well. The focus on price and promotions is working well.

We're being very disciplined in buying. We're doing better buying.

So I really feel like there is a lot of blocking and tackling across all things and I'll to work on that. So I would there is no magic in the improvement, it's just a lot of hard work across a lot of core initiatives and we feel that we're doing the right things right.

And, Ed, I'd like to add certainly we've still had a tough economy. We still have a tight consumer.

And I would agree with everything Wade said. I think we're doing everything we can do to manage through that profitably.

But we still have a tough consumer and we're going to have to make sure that we balance swing indoors without giving up too much margin. I think the operations folks and merchandisers had done a nice job in balancing that.

All right. And then if I could just add one last question here.

Greg, where do you stand on flu shots currently where they were this time last year? And then sort of intertwined with that, you don't give guidance obviously for next year?

But at your analyst's meeting a couple of years ago, you laid out getting back to double digit growth. The street is going to be up probably at least mid teens now for next year, given where they were before today's report.

Can you do double digit growth for 2011? Is that in the mix?

Ed, I'll answer the second one first. And then flu maybe I'll turn it over to Kermit.

But certainly, our goal as we stated in 2008 is to get back to double digit earnings growth. And stronger return on invested capital trends in order to grow our shareholder return or shareholder value.

So that goal hasn't changed. As far as timing, obviously we don't do that, Ed.

I think we're doing all the right things to achieve that goal. As far flu shots, as I said, we've just over two million through yesterday.

I'll Kermit kind of maybe take it from there and talk about where we are versus last year. And some of the things that we're doing this year that give us confidence that we're going to hit that 15 million flu shots.

Ed, as you remember last year in the first quarter we provided five million flu shots. And as Greg said, through yesterday, we've provided over two million flu shots this year.

I think what I'd like to say is last year we were very disappointed that we couldn't help more of our customers because of the lack of the flu vaccine. And this year, that won't happen.

I mean we're prepared to be there for our customers and to be in stock. So we have an unprecedented campaign this year that we put in place to reach our goal of 15 million flu shots.

Greg talked about our 26,000 certified pharmacists and nurse practitioners, more than anyone or any other retailer in this country. We're also providing more access and convenience this year versus last year by offering flu shots everyday all day.

I actually had a customer send me an email just the other day to talk about how wonderful it was that you could get a flu shot at 9:30 pm at night. And flu patient satisfaction of course, we have had greater than 90% give us the satisfied or very satisfied overall experience.

So we have truly reformed the delivery system for flu shots in this country. And also, Greg talked about the CDC recommending a universal flu vaccine with everyone over six months of age getting a flu shot.

And if you think about last year, our seven million shots only represented 3.5% of the market. So with that market significantly growing, this year our 15 million goal is certainly going to be aggressive and a challenge.

But we certainly think that that is something that we can beat. And our flu gift card has given us a tremendous amount of early awareness.

Remember last year the CDC moved up the flu season to September. Normally the flu season doesn't actually start until October.

So that gift card has given us a tremendous amount of early awareness. So we're excited about this season which actually doesn't start until sometime in the next two weeks.

But we're already two million shots into it.

The execution wage talk about the merchants and the positive gross margin, front end gross margin trends in the fourth quarter. Can you just talk a little bit about how the performance improved so markedly in 4Q relative to 3Q?

That the 4Q gross margin seemed like it improved a lot more in 3Q. Was it something that they improved on even further?

What contributed to that material step up in 4Q relative to 3Q?

I'll jump in. I think certainly for the quarter we saw less aggressive markdowns and summer clearance than we did a year ago.

I think that contributed some. I think also less aggressive clearance in our CCR markdowns, we're pretty much through that.

That obviously contributed some. But I also think they did a nice job in really maintaining and balancing that pay off between price and promotion.

And I think we've done a nice job with what we call our key value items. Our basis everyday items and making sure we're priced right to show value.

As well as what we put on the front and back page of our ads. But also at the same time not giving up excess margin.

And I think what we're really enthusiastic about is the opportunity that we still have to drive private brand penetration and the learnings that we are able to bring back from Duane Reed to help us expand that. So just a good balance of price and promotion.

Related to the spend, the second part of the question is, I understand the vision long term for the gross margin dollars to grow faster than SG&A dollars which makes sense. Is you think about achieving that goal in 2011, what are the factors that are in your favor or not in your favor to accomplish that goal in 2011?

I think what I'm try to say is on the front end we'll continue to I think gain momentum on the quarter initiatives we laid out. CCR as you've seen the results, it's still only partially out there.

But they're getting stronger all the time. So we believe that is going to give further momentum.

If you think about the pharmacy obviously there is a balancing act where we've done a lot of good jobs to take efforts to strengthen and to stabilize reimbursement, although pressure will still be there. But we still got the expansion script life services coming in our favor.

And then ultimately, we'll have an illusionary wave. We do have things like AMP out there which are unknowns, but I think that in our model we try to do as good as we can as planned for the toughest case.

And then if a better case comes, that's a tailwind as well. So those are the core kinds of things.

Again, a look at the economy before, it's very tough out there. Whether it's going to get easier any time soon?

Nobody knows. But we're trying to plan a model.

It's going to successful even in tough times. That's what we're focused on.

One of the things that Wade has mentioned in the past is that we can't control the introduction of new generic. So between the slowdown in new generics some of the deflation in the old generic and AWP we had a huge headwind against us last year.

One more question on gross margins, but you mentioned improved pricing, promotion and other efficiencies, how much did that contribute to the 70 basis points? And what exactly did you do to improve pricing and promotion?

And then, how far along are you on the test of the loyalty card? And did that have any impact?

And then just, this is around the gross margin topic. Can you talk about what you thought with regard to private label penetration for the year and the quarter?

And where are you right now? And what are the goals?

I think I get all of those Deborah. I think as far as front end there's a contribution to total margin, I don't know if we have broken that out, if we have.

But I think we definitely were encouraged by what we did, we do at the front end. As far as the breakdown as I said, I think that we are really focusing to make sure that we are price right on key items that really drive value in our consumers mind today.

And our folks are looking for valuable private brands, bonus sizes of national brands. And I think that we just did a nice job, as I said not giving up excess, but at the same time swing indoors.

So, I think we have to understand, and we have a pretty good idea of what the value of our convenience is and what that delta is that we can get for that convenience. And I think we're really on top of making sure we manage that delta.

I think the next question on loyalty. As you know we have rolled out or started to pilot in three markets, in May of this year.

So we got about three to four months of data now. We feel good; we're encouraged with the early results from those three markets.

We also, as you know through the acquisition Duane Reade have acquired a loyalty program that gives us a lot more data and some rich data. So we're encouraged where we are.

We're willing to get about a good six months to may be eight months of data, before we decide how to fine tune it and when we'd begin to implement it nationwide. We should have enough data after the first year to begin to think about, when we'd go nationwide.

Let's see, I think you talked about private label. What I'm encouraged most with was private label is, we've over-penetrated, over indexed in our private label with what where you would think we do and that's an over-the-counter cost goal, the health and beauty type items.

We've under -indexed to our 20% or so total penetration in consumables. That's where Duane Reade brings a tremendous amount of expertise and talent because of their history with Loblaws and come out of a strong private brand consumable retailer.

So we're looking forward to bring in through a lot of their expertise to drive our penetration in the consumables. And we began that last month or two with our first introduction of the Duane Reade private brand throughout the chain with about 15 to 20 core SKUs.

So I think it feels like to a lot of us is, this is a real breakout quarter from a gross margin perspective. I mean, was this driven more by process, or technology, or how would you kind of sum it up?

I think all of the above. I think one of the things that we probably haven't maybe talked about as much or maybe even made that clear is that CCR is much more than just what you physically see in the store.

And certainly, we're focused on the results that we're seeing in store sales, customer experience, throughput and all of that. We feel extremely good about it.

But in the last 12-18 months Bryan Pugh and his team frankly have rebuilt the entire plumbing of our merchandizing process. So we have much better sophistication in the systems to be able to manage multiple planograms or categories.

We've really improved our ability to understand pricing in that delta we're talking about for convenience. So I think it's frankly a lot of process system improvement that's helping us manage that and achieve that balance I'm talking about between price and promotion more so than we have in the past.

Just a quick one on Duane Reade dilution going forward. Anecdotally, what's left to consolidate there and can you have a sort of guess on the EPS impact for the next fiscal year?

Dilution this year ended up being about $0.05 or $0.06 maybe, a little bit more than we anticipated prior, as we pulled some items aboard. I think next year we're roughly staying around $0.02 to $0.03 dilution.

So that might be a little bit on the low end of that, because again we pulled some of those forwards. And then going on, we're move into (our $0.03 to $0.05).

For the most part, we're now at the point where it's roughly awash. But again, prior to little bit of dilution last year, but I've hit the low end of the $0.02 or $0.03 because we did pull some of those one-times forward into this prior fiscal.

On the Rewire, just wanted to clarify, you got about $100 million extra savings in fiscal '010, so you're sort of bumping down the $500 million to $400 million in fiscal '11. Is that exactly right?

We had, between the savings that (Duane) cost, its $60 to $70 million more and then the one-times being $40 million less which pushes over.

Do we see a lot of that incremental upside, $500 million to $600 million of net positive in the fourth quarter?

Well we certainly saw a nice pick-up because we actually accelerated some of our plans for next year into the fourth quarter. So that certainly helped.

But I think moving forward those will carry through as well. So our goal is to at least meet our goal of $1 billion, and hopefully we'll beat it.

But we're really focused on is meeting it. That's the goal, is to absolutely meet it under any conditions.

And then just on generics, I think Kermit mentioned before, fewer new generics in fiscal '010 and some deflation on some older ones. How are you thinking about fiscal '11 versus fiscal '010 on the generic front sort of all in?

Well, Tom, I think great year. I think on the generic front where Kermit was going is, last year was a really tough year as far as the new generic growth that we saw versus the year before.

We still have a tough or a tighter year for new generics this year, but it's certainly less than the dip that we saw last year from the previous year. And as you know, by next fiscal year, the following fiscal year we're going to be into the new generic wave.

I wanted to ask you, first on the uptick in the remodels, is that sort of the control group, the 40-50 stores? What's the sample size there, and can you discuss how that translates to (inaudible) other stores you got done and stores going forward?

And also, can you discuss if you have done any other large metro markets and what the results would be, and what's coming off those markets?

I think the first number you're referring to that I gave is the 35 store pilot group, which we are seeing a 3.7% or so tick up from the previous quarter. And really that's our best control group, or the best group that we're looking at, because we have a good control group of stores to measure.

We feel good with the improvements we're making and the trend we're seeing. The other group that we're really focused on that I called out were the 200 stores in the wave two.

And we feel good with where they are, as I said the 13 weeks after conversion. So obviously we're running up in comp sales in a tough economy, so we feel good overall.

Keep in mind that even though we will only have, or will have 2000 stores converted to CCR, a lot of the CCR benefits we're seeing chain-wide now with the enhanced categories and the assortments that we're able to roll out. So hope that answers your question.

I guess outside of taxes or markets that are very competitive, or the economy nosedives quickly or something, why shouldn't what we're getting at the pilot stores eventually translate to a large majority of the remodels?

Well, we hope that it would Andy, and the good thing is, is as I said that we're a year into those pilot stores, nearly, and we've made a lot of improvement. So we feel good with that trend.

Remember that this is really, I would say kind of foundational work; it's really, you're just trying to get the base platform right for the future, except that it's increasing our sales, it is increasing our margins, it is helping reduce our working capital and we're providing a better customer experience. I think that's the key thing is trying to keep these four metrics positive as we build that base for the future.

So it sounds like you think, in terms of sales growth, CCR is more of a cumulative process than, you know a one-time wonder, a great remodel, we hit it, that type of thing.

Yes, I mean, this is ongoing. This is just the first step of a many-year, (many-light) journey.

So it's really trying to improve our store experience to the benefit of our customers.

And another topic if I could, and then I'll get off. Can you update us on some of the direct payer progress?

It might be, you're seeing it here in the marketplace or I think there might have been some internal changes in how you're going to market there or how you are managing that? And perhaps as you exercise that way of going to market, what is the strategic value of having a PBM for Walgreens?

Well, Andy, we feel good with where we are with our direct-to-payer's. And by payer, we look at that as employers, our pharmacy benefit management partners that we work with, health plans, and the government and so forth.

I think a good example of the progress we're making in our direct-to-payer approach is what I talked about with our flu shot. We had national agreements with UnitedHealthcare and CIGNA on providing flu shots to millions of their members as well as many of the regional Blues.

And that was a result of Hal Rosenbluth and his team that I think you're alluding to. We have consolidated our sales and client services organization under Hal and his teams.

We now have one group that's bringing all Walgreen's Pharmacy and Health Wellness solutions to all those payer segments. And I'm feeling very good that we're really encouraged with what's happening there and I think across all payer segments.

In your prepared comments, you talked about a $1 billion gross profit headwind that you've faced in 2010. I think you said $500 million came from the economy.

You mentioned generics, you mentioned AWP. When we looked at fiscal 2011, I guess about $1 billion.

What do you think will be repeated? And then also maybe what things could be impacting gross profit in 2011 that would be a headwind, like A&P for instance?

I guess what are your expectations on that?

Ann, it's an excellent question. I guess what I would say is, on a relative year-on-year, the economy is factored.

Now it's up to us to make (innovations) to be successful in any economy. So you don't have that kind of, call it step-down effects.

There is undoubtedly reimbursement pressure. We don't think there's going to be as much pressure as we saw last year.

That was probably the greatest year, as we said of $0.5 billion'ish between the less than normal generic lift between AWP and between the variety of other reimbursements. So we think it will be challenging, but not as challenging.

A key part of that is A&P. There's certainly a lot of activity happening around that, you know for us to speculate when or if that kicks in exactly on the day the amount is probably a bit premature; there is lot of activity.

But certainly we're assuming across all reimbursement, it will still be a challenging environment, although I would say probably not as challenging.

So is it fair to say, maybe of that $500 million you only experienced half of that in fiscal 2011?

I would hesitate to give any number. I think you know it's premature and some of these things are very binary.

But I would say that last year, there was a lot of challenging factors and I don't see this year at least repeating that in aggregate.

Hi Greg, couple of things. On the reimbursement issue, what's the prognosis for State Medicare this year?

You would think that that might be tougher than last year. And then long term how do you think the reimbursement tug of war between retail and PBMs plays out?

You might think, long term, after the generic cycle maybe it gets tougher secularly and they try to protect profitability. How do you think about those two things?

Hi John, good to hear from you. I think that State Medicaid's AMP, you know I'd kind of lump those all together as Wade said.

I think that certainly there's going to be a headwind. And right now there's a lot of moving parts in AMP that we're on top of regarding timing and what the final impact will be.

But certainly whatever we end up seeing, not only have we planned forward already as Wade said, but I think we'll still be working with states, both regarding State Medicaid as well as Medicare with the government. But as far as state, we think we can bring a lot of value to the states, not only with how we can help them on their pharmacy costs, but also on their total medical costs.

And that's John, I think where we really are focused. And probably the biggest maybe difference between us and others would be, we're focused on helping provide value to all payers including state to lower the total medical costs and not just pharmacy.

So we'll be focused on working with them across the entire medical spend. As far as the relationship or the reimbursement environment with the commercial payers, the PBMs and others, I think that it's all about providing value.

And I think payers going forward are all going to be looking for help to improve the quality of their healthcare spend as well as controlling that cost. And as I've said several times, keep in mind, pharmacy is only about 10% to 12% of total medical spend for most employers across this country.

We are seeing employers more and more focused on looking at how to improve the total medical spend, both from a quality and a cost. So I think it's all about us providing value and that's why we're trying to transform community pharmacy as we are doing, to provide more value.

As you recall, AMP was included in the Deficit Reduction Act of 2006. And there are certainly reasons that that implementation has been delayed, and one of those is that there's a study out that says over 12,000 independent pharmacies would have to close their doors that couldn't survive in an environment where you have further rate cuts.

So there is a challenge around the implementation of AMP, and we recognize reimbursement pressure will continue but we expect to be able to manage our commercial segment going forward as we have in the past. And although the pricing index may change, we wouldn't expect it to have a dramatic impact on our current reimbursement economics.

And then one final question. When you think about the frond end as it sits today in this economy, how do you look at price elasticity in terms of the question of how much do you want to invest promotionally?

How do you look at price elasticity today versus maybe a couple of years ago? And is the dynamic interchange here such that maybe gross profit grows less because of sales growth more because of margins improving than might have been the case a while back?

I think the key thing is that in any challenging economy, one learning globally is, is it is important to focus on value. But value doesn't always mean price.

In fact value is about reframing the value you provide. We provide fantastic convenience; we have great private label offerings.

If you look across the store, we're expanding things to make it even more convenient for people to get more things. As Greg mentioned, we've done a terrific job of focusing on things like the key value items that people really, really, want to make sure that we're sharp on.

So I think the important thing for us is not to just get into a price war game, but to really say, what are the things that we can do to provide value. And even on the back end flu shot, a flu shot from Walgreen's is $30, is a tremendous value.

It's cheaper than going to a doctor and getting it, and it's certainly a lot cheaper than getting sick and being out of work or (hastening) contaminant flu or whatever. So I think we are in a good spot to provide good value in the front-end and the backend.

And I guess what I would just say is, it's important for us to recognize that that doesn't mean just cutting prices.

Thank you for joining us today. We'll announce September monthly sales on October 5.

After that our next Investor Relations event will be our Analyst Day on November 4. We look forward to seeing many of you there.

For those who will not be attending in person, Analyst Day will be simultaneously webcast through our Walgreen's Investor Relations website. Our next quarterly financial announcement will be Wednesday, December 22; that's when we will announce fiscal 2011 first quarter results.

Until then, thank you for listening, and we look forward to talking to you soon.