Drug Retail
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WBA $29
27 Jun 2023 |
Walgreens hasn’t traded this low since June 2010; what gives?
One would think that an enormous retail pharmacy chain would be relatively immune to a slowing economy and a pullback in consumer spending. Prescription drugs are pretty important, after all. Why, then, are shares of Walgreens Boots Alliance (WBA $29) sitting at their lowest point in precisely thirteen years? After reporting an abysmal fiscal third quarter and slashing its full-year guidance, management blamed “challenging consumer and macroeconomic conditions.” We don’t buy any of that. Despite management’s comments, sales rose 8.65% from the same quarter last year, to $35.42 billion. The disconnect came in net income, which fell from $289 million in fiscal Q3 of 2022 to $118 million in the latest quarter—nearly a 60% plunge. The company reported a $3.72 billion loss two quarters ago after paying a massive opioid settlement, but that is in the rear-view mirror. We see the challenges driven more by increased competition than economic conditions or a “drop off in Covid-related sales.” CEO Rosalind Brewer said the company will increase its cost-cutting initiative to $4.1 billion and take other steps to increase profitability in its health care segment, but with Amazon (AMZN $127) Pharmacy gaining momentum, and multiline retailers like Target (TGT $134) and Walmart (WMT $155) increasing market share, will that be enough? We don’t think so. Even at a thirteen-year low, the share price doesn’t look that attractive. It is going to take an intelligent strategic initiative to garner our interest once more, and we don’t see management bringing anything like that to the table. We closed Walgreens from the Penn Global Leaders Club at $36 per share in November 2020. Up until that point, it had been a staple company in the portfolio. |
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AMZN
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Drug retailers hit the skids after Amazon launches its new pharmacy
(18 Nov 2020) Rite Aid got hit the hardest, down 15%, followed by Walgreens (-10%), CVS (-8%), and even retail giant Walmart (-2%). What caused these one-day drops in the shares of major drug retailers? The announcement that Amazon (AMZN $3,136) would finally be adding a pharmacy counter to its site. Rite Aid tried to throw cold water on the announcement, with the COO arguing that getting prescription drugs involves a lot more than does a typical shopping transaction. Really? We think of the hassles we have had in the past simply getting prescriptions filled in a timely manner, and it makes perfect sense as to why these drug retailers fell so much in a day. We don't recall, however, any extensive conversations with the pharmacist at the local Walmart. "Name? Date of Birth? You have one prescription ready." That's about the extent of it. And is it really the business of the person behind me in line as to what year I was born? When filling scripts online directly through our PBM (Cigna), we wonder how long it will actually take the post office to deliver the goods. Like them or not, we have full faith in Amazon's ability to deliver meds to our home in one or two days, which is what Amazon Pharmacy is promising for its 80 million or so Prime members. Walgreens CEO Stefano Pessina said he is not particularly worried about Amazon's move into the space. Does anyone believe that? Amazon Pharmacy will be a major disruptor in the prescription drug space. Investors need to take a renewed look at their holdings in the drug retail and medical distribution (think McKesson and Cardinal Health) industries. We can't stand Jeff Bezos, but owning Amazon in the Penn Global Leaders Club has certainly paid off. |
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WBA
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Walgreens' latest move to win health care biz: add primary care docs
In the constant battle among drug retailers to gain more ground in the health care arena, Walgreens Boots Alliance (WBA $37-$43-$65) is about to seriously up the ante. As rival CVS Health (CVS $63) continues to aggressively fight for market share, the company has announced plans to add health care sites, complete with MDs, to roughly 700 of its stores over the coming few years. To do this, Walgreens is teaming up with primary-care provider VillageMD, which will staff the new sites and pay Walgreens to use the space. In return, the drug retailer will invest around $1 billion in VillageMD through equity and convertible debt positions. After the full investment has been made, Walgreens will own about one-third of the business. The company's strategic vision is simple: become a destination for health and wellness, and provide as many services and products as possible to meet the medical needs of its customers. We've had our doubts about the C-suite at Walgreens in the past, but we believe this was a dynamic move to make, and that they will be able to pull it off. Additionally, shares have fallen substantially since we last excoriated the CEO. Selling for around $42 per share, WBA carries a dividend yield of 4% and a paltry P/E ratio of 10. |
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WBA
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Can Walgreens really pull off the biggest leveraged buyout in history? Doubtful. (07 Nov 2019) It's a tough time to be a retail pharmacy. With pressure coming from online competitors, insurance companies, and government blowhards, one can understand why a drug retailer would want to go private. However, when you are Walgreens Boots Alliance (WBA $49-$60-$86), with a market cap of $53 billion and another $17 billion in debt, that would amount to herculean task of epic proportions. Nonetheless, the drugstore chain has hired a legal team and has met with private equity firms to discuss just that—going private in a leveraged buyout. Investors have sobered up to the reality of just how much debt such a deal would create, with the 7% jump WBA shares made following the news now all but gone. The previous record-high for an LBO came in 2007, when private equity firms raised $44 billion to buy Texas energy interest TXU. This deal would be about 60% larger. Somewhat ironically, the news that management is looking to go private has increased our doubts about the firm going forward, as it brings into question the company's strategic plans. While CVS (CVS) picked up health insurer Aetna and benefits manager Caremark, greatly expanding their breadth of offerings and the firm's vertical integration, WBA has been slow to the party. Yes, they picked up a 26% stake in drug distributor Amerisource Bergen (ABC) and have been in joint ventures with Humana, but three-quarters of the firm's revenues come from the billion or so prescriptions it fills annually, and those margins are under increasing pressure. It also doesn't help that Amazon (AMZN) bought online pharmacy PillPack last year. As we said, it's a tough time to be a retail pharmacy. We wouldn't touch shares of WBA right now. Leadership involves formulating a strong and cogent strategic plan based on foresight and vision, not running for the exit sign when the going gets tough. Unfortunately, CEO Stefano Pessina is making it clear he would prefer the latter.
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AMZN
WBA CVS |
Drug retailers fall as Amazon announces it will buy online pharmacy PillPack. Walgreens Boots Alliance (WBA) fell nearly 10% in pre-market trading on the report; CVS Health (CVS) was off over 8%. What was the news? Amazon ($932-$1,666-$1,763) announced its plans to buy online pharmacy PillPack for an undisclosed amount. This move buttresses concerns by industry players that the $808 billion behemoth was, indeed, planning on becoming a force in the industry. Privately-held PillPack specializes in supplying drugs to patients battling chronic conditions, who must take multiple daily doses for those conditions. While terms of the deal are undisclosed, Walmart (WMT) did consider buying the pharmacy for around $1 billion earlier this year.
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GNC
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GNC soars nearly 50% in early Thursday trading, but there's more to the story
(18 Jan 2018) First the good news: shares of $342 million micro-cap GNC Holdings (GNC $3-$5-$11) were soaring nearly 50% in early Thursday trading after the health and vitamin retailer handily beat Q4 profit expectations. Adjusted EPS came in at $0.24 to $0.25 versus expectations for $0.23. Additionally, same-store sales rose 5.7% from Q4 of 2016, and the company affirmed its free cash flow estimate for 2017 to be in the $190 million to $210 million range. That being said, the last time we reported on a GNC earnings beat the company jumped 25%, to $9 per share. Today's near-50% gain made the company's shares rise to $5, or about 45% below where they were trading after the last big spike. Odds are the company will be taken private one of these days, but the $1.629B enterprise value of GNC will make that a costly undertaking for a private equity firm. |
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CVS
AET |
CVS is nearing deal to buy Aetna for $65 billion
(01 Dec 2017) Feeling the heat from arch-rival Walgreens Boots Alliance (WBA), CVS Health (CVS $66-$77-$85) is closing in on a deal to buy healthcare plan provider Aetna Inc. (AET $116-$180-$192) for around $200 per share, valuing the company at about $65 billion. The three major drugstore chains, Walgreens, CVS, and Rite-Aid, could have easily allowed a changing landscape to push them into oblivion. Instead, they have skillfully maneuvered themselves (well, the top two companies anyway) as healthcare juggernauts. Consider this latest move: After CVS merged with Caremark in 2007 it became a huge pharmacy benefits manager (PBM); now, with the Aetna acquisition, it will have a captive customer base of millions who are insured by Aetna. While we still prefer Walgreens as an investment, management at both companies should be applauded for their leadership. |
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GNC
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(18 Apr 2017) GNC rockets 25% in one day on earnings beat. It was just a few months ago that we were pondering whether or not GNC's (GNC $7-$9-$36) strategic turnaround effort would work. Well, it may still be too early to answer that question definitively, but investors sure liked their earnings beat today. The stock soared 25% on a revenue beat of $645 million, versus expectations for $623 million. The company credited Amazon Marketplace for a major uptick in online sales. It sure is a cheaper venue than the local strip mall, with its extortionary triple-net lease terms. For all the hoopla, let's not forget that the stock move was from $7 to $9; the company is not out of the woods just yet.
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GNC
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(15 Dec 2016) Can the Super Bowl save GNC? It hasn't gone the way of Radio Shack yet, but supplement retailer GNC (GNC $13-$13-$36) continues to plummet into the abyss. Shares are down almost 60% this year as sales flounder and legal troubles mount (the company just got slapped with a $2.25 million fine from the DoJ). Management's strategy? Pay $5 million for a 30-second spot in the first quarter of the Super Bowl. GNC will use the ad, and subsequent others in the first part of 2017, to build awareness of the company's rebranding effort. Good luck—an awful lot of competition has entered the space over the past decade.
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CVS
WBA RAD |
Battle of the drugstores: CVS warns of losses due to Walgreen’s tactics
(08 Nov 16) When drugstore chain CVS (CVS $74-$74-$107) bought pharmacy benefits manager (PBM) Caremark nearly a decade ago, they dealt a serious blow to rival Walgreens. Then, seven years later, Walgreens merged with PBA Alliance Boots to become Walgreen Boots Alliance (WBA $72-$80-$87). No doubt about it, the pharmacy prescription business has been in upheaval ever since the arrival of Obamacare. It has been nearly three years since the WBA merger, and CVS is apparently feeling the pain. The company dropped 12% after announcing a bleak outlook for its prescription business going forward. CEO Larry Merlo said in the company’s quarterly earnings call that Walgreen’s aggressive deal-making could cost the company 40 million prescriptions next year. It seems that WBA has become a little too good at imitating the CVS plan to become the dominant player, and is striking deals with other health plans that completely exclude CVS from their networks. Both giants filled roughly 1 billion prescriptions last year, so a loss of 40 million would represent about 4% of CVS’s most lucrative business. In addition to a similar number of prescriptions filled, both companies have a market cap of around $80 billion. As for the numbers, it is evident as to why there is such a heated battle among the drugstores to get and retain prescription business. Of CVS’s $44.6 billion in profit, $30.4 billion came from its Caremark division. Net income rose to $1.54 billion—a 24% increase. As for WBA, it just struck a deal to acquire the third-largest drugstore, Rite-Aid, and signed a deal to become the DoD’s preferred network provider—it took the business from CVS. (Reprinted from the Penn Wealth Report, Vol 4 Issue 45) |