Exit and disposal activities

6 Months Ended

Feb. 29, 2020

Restructuring and Related Activities [Abstract]

Transformational Cost Management Program

On December 20, 2018, the Company announced a transformational cost management program that was expected to deliver in excess of $1.0 billion of annual cost savings by fiscal 2022 (the “Transformational Cost Management Program”). In April 2019, the Company announced that it had increased the expected annual cost savings to in excess of $1.5 billion by fiscal 2022, which was further increased to in excess of $1.8 billion in October 2019. 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 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. In addition to these impacts, as a result of the actions related to store closures taken under the Transformational Cost Management Program, the Company recorded $508 million of transition adjustments to decrease retained earnings due to the adoption of the new lease accounting standard (Topic 842) that became effective on September 1, 2019. See note 17, new accounting pronouncements, for additional information.

Since the inception of the Transformational Cost Management Program to February 29, 2020, the Company has recognized cumulative pre-tax charges to its financial results in accordance with GAAP of $605 million, which were primarily recorded within selling, general and administrative expenses. These charges included $36 million related to lease obligations and other real estate costs, $275 million in asset impairments, $236 million in employee severance and business transition costs and $58 million of information technology transformation and other exit costs.

Transformational Cost Management Program charges are recognized as the costs are incurred over time in accordance with GAAP. The Company treats charges related to the Transformational Cost Management Program as special items impacting comparability of results in its earnings disclosures.

Costs related to exit and disposal activities under the Transformational Cost Management Program for the three and six months ended February 29, 2020 and February 28, 2019 were as follows (in millions):


Three months ended February 29, 2020	Retail Pharmacy USA		Retail Pharmacy International		Pharmaceutical Wholesale		Walgreens Boots Alliance, Inc.
Lease obligations and other real estate costs	$	9	$	1	$	—	$	10
Asset impairments	3		—		—		3
Employee severance and business transition costs	39		29		4		72
Information technology transformation and other exit costs	9		13		1		24
Total pre-tax exit and disposal costs	$	60	$	43	$	5	$	109


Six months ended February 29, 2020	Retail Pharmacy USA		Retail Pharmacy International		Pharmaceutical Wholesale		Walgreens Boots Alliance, Inc.
Lease obligations and other real estate costs	$	10	$	1	$	—	$	11
Asset impairments	11		3		—		15
Employee severance and business transition costs	72		30		9		111
Information technology transformation and other exit costs	16		17		2		36
Total pre-tax exit and disposal costs	$	110	$	52	$	12	$	173


Three months ended February 28, 2019	Retail Pharmacy USA		Retail Pharmacy International		Pharmaceutical Wholesale		Walgreens Boots Alliance, Inc.

Asset impairments	—		26		85		111
Employee severance and other exit costs	14		14		11		39

Total pre-tax exit and disposal costs	$	14	$	40	$	96	$	150


Six months ended February 28, 2019	Retail Pharmacy USA		Retail Pharmacy International		Pharmaceutical Wholesale		Walgreens Boots Alliance, Inc.

Asset impairments	—		32		85		117
Employee severance and other exit costs	16		35		11		62

Total pre-tax exit and disposal costs	$	16	$	67	$	96	$	179

The changes in liabilities and assets related to the exit and disposal activities under Transformational Cost Management Program include the following (in millions):


	Lease obligations and other real estate costs		Asset Impairments		Employee severance and business transition costs		Information technology transformation and other exit costs		Total
Balance at August 31, 2019	$	17	$	—	$	57	$	4	$	78
Costs	11		15		111		36		173
Payments	(1)		—		(59)		(10)		(70)
Other - non cash	3		(15)		—		(8)		(20)
ASC 842 Leases adoption¹	(4)		—		—		—		(4)
Currency translation adjustment	1		—		—		—		1
Balance at February 29, 2020	$	27	$	—	$	110	$	22	$	158

¹Represents liability for facility closings and related lease termination charges recorded as an offset to right-of-use assets upon the adoption of ASC 842. Refer to note 4, leases and note 17, new accounting pronouncements for additional information.

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 and related assets, 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 $400 million, compared to the Company's previously stated expectation of $350 million, of which $335 million have been recorded to date, primarily within selling, general and administrative expenses. The Company expects to incur charges of approximately $190 million for lease obligations and other real estate costs, of which $159 million have been recorded to date and approximately $210 million for employee severance and other exit costs of which $176 million have been recorded to date. The Company estimates that substantially all of these cumulative pre-tax charges will result in cash expenditures.

Store Optimization Program charges are recognized as the costs are incurred over time in accordance with GAAP. The Company treats charges related to the Store Optimization Program as special items impacting comparability of results in its earnings disclosures.

Costs related to the Store Optimization Program for the three and six months ended February 29, 2020 and February 28, 2019 were as follows (in millions):


	Three months ended						Six months ended
	February 29, 2020		February 28, 2019		February 29, 2020		February 28, 2019
Lease obligations and other real estate costs	$	18	$	9	$	21	$	2
Employee severance and other exit costs	12		22		18		49
Total costs	$	30	$	31	$	39	$	51

The changes in liabilities related to the Store Optimization Program include the following (in millions):


	Lease obligations and other real estate costs		Employee severance and other exit costs		Total
Balance at August 31, 2019	$	407	$	22	$	429
Costs	21		18		39
Payments	(18)		(32)		(50)
Other - non cash	(1)		(5)		(6)
ASC 842 Leases adoption¹	(378)		—		(378)
Balance at February 29, 2020	$	31	$	3	$	34

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 liabilities related to the Cost Transformation Program declined by $382 million representing liability for facility closings and related lease termination charges recorded as an offset to right-of-use assets upon the adoption of ASC 842. The remaining liabilities as of February 29, 2020 were not material.