Exit and disposal activities

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	Retail Pharmacy USA		Retail Pharmacy International		Pharmaceutical Wholesale		Walgreens Boots Alliance, Inc.
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 severance and other exit costs			Asset Impairments			Lease obligations and other real estate costs			Information technology transformation and other exit costs			Total
Balance at August 31, 2018	$	—		$	—		$	—		$	—		$	—
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):



	Real estate costs			Severance and other business transition and exit costs			Total
Balance at August 31, 2017	$	521		$	79		$	600
Payments	(139		)	(68		)	(207		)
Other - non cash	32			(3		)	29
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	Retail Pharmacy USA		Retail Pharmacy International		Pharmaceutical Wholesale		Walgreens Boots Alliance, Inc.
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