Walgreen: Is There Value in Drugstores?

Walgreen Boots Alliance (NASDAQ: WBA) is a far larger and more diverse company than most Americans realize. It is also a very profitable organization that has become one of the world’s retail giants.

The company consists of two separate drugstore operations: Walgreens in the United States and Boots Alliance in Europe, Asia and Latin America. Walgreens operates pharmacies under the Walgreen and Duane Reade brand names in the United States. Boots Alliance operates drugstores under the Boots name in Europe and Thailand, the Benavides brand in Mexico and the Ahumada name in Chile.

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The most impressive thing about Walgreens is its assets:

  • 12,755 retail stores in nine countries
  • 4,582 Boots, Ahumada and Benavides stores
  • 8,173 Walgreen and Duane Reade stores in the United States
  • 2,510 Boots locations in the United Kingdom
  • 1,028 Benavides stores in Mexico
  • 451 Ahumada pharmacies in Chile
  • 261 Boots stores in Thailand
  • 161 Boots locations in Norway
  • 80 Boots in the Irish Republic
  • 66 Boots locations in the Netherlands
  • 25 Boots in Lithuania
  • A wholesale network of 301 distribution centers in 12 countries that services up to 140,000 pharmacies and healthcare providers outside the company’s pharmacies.

To add icing to the cake, Walgreen is working on a deal to purchase the third largest drugstore operator in the United States, Rite Aid (RAD), which operates around 4,600 stores in the United States. If the deal is successful, it would give Walgreen around 17,355 stores worldwide and 12,773 locations in the United States alone.

Even if Walgreen is forced to sell or close up to 1,000 Rite Aid locations to comply with U.S. antitrust laws, it would still operate around 16,355 stores worldwide and 11,773 locations in the USA. Note that some analysts think that Walgreen might end up closing as many as 3,000 stores, according to Fortune.

This would make Walgreen the largest drugstore chain and the second largest pure retailer in the United States. CVS Health (NYSE: CVS), which operates a massive prescription benefit plan, would be larger in terms of revenue but not in footprint.

Walgreens’ Impressive Revenue

Naturally, the first thing that value investors will ask about Walgreen is the all-important question: “Is it making money?” The current answer, as determined by the financial numbers, is yes.

On August 31, 2015 – Walgreen reported the following impressive figures:

  • A TTM revenue of $103.44 billion

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  • Impressive TTM revenue growth. Walgreen reported a TTM revenue of $76.39 billion in August 2014 that expanded to $103.44 billion a year later, largely because of its merger with Boots Alliance.

 

  • A net income of $4.179 billion

 

  • A free cash flow of $1.144 billion

 

  • $3 billion in cash and short-term investments
  • $5.664 billion in cash from operations

 

All is not well at Walgreen, although it did report a profit margin of .09%. However, it did pay off for investors with a dividend yield of 1.68% and a return on equity of 15.55%.

The scope of Walgreens’ operations is impressive, but what about its prospects for the future? To ascertain that, we will perform one of my famous quick and dirty SWOT (Strengths, Weaknesses, Opportunities and Threat) analyses.

Walgreen Boots Alliance Quick & Dirty SWOT Analysis

Strengths:

  • Geographically diversified company operations in nine different countries and 50 American states

 

  • Growing revenues

 

  • Excellent prospects for revenue growth. The Rite Aid acquisition would give Walgreen $27.85 billion in additional revenues and a TTM revenue of around $130 billion, making it the third largest retailer in the USA in terms of revenue.

 

  • Largely recession-proof business; many customers need its primary products—prescription drugs—to stay alive or maintain good health. A large percentage of those prescriptions are paid for either by government-run, single-payer health insurance or health insurance companies, which guarantees revenue and float.

 

  • Large footprint

 

  • Large size makes for economy of scale, particularly in the USA

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  • Smaller, convenient urban and suburban locations

 

Weaknesses

  • Lacks popular amenities that some of its largest American competitors, such as Kroger, Safeway, Costco and Walmart, can offer, including filling stations, groceries and large selections of dry goods.

 

  • Lacks benefit plan income

 

  • Vulnerable to disputes with benefit plan operators and health insurers. It was badly hurt by a battle with Express Scripts in 2012.

 

  • High operating costs, particularly in the form of salaries for pharmacists and clinic personnel

 

  • Lack of control over aspects of business because it has no prescription business plan

 

  • Highly vulnerable to government regulation and price controls, particularly in Europe and Latin America

 

Opportunities

  • Expansion of the health insurance system in the United States through Obamacare could greatly increase customer base.

 

  • Potential implementation of single-payer health insurance in the United States could increase customer base.

 

  • An aging population in Europe and the United States will greatly increase demand for prescription drugs.

**FILE** In this June 23, 2008 file photo, pedestrians walk past a downtown Chicago Walgreens store. Drugstore operator Walgreen Co. said Monday, Dec. 22, 2008, its profit fell 10 percent in the fiscal first quarter because of costs to open more than 200 new stores. (AP Photo/Russel A. Daniels, file)

  • A doctor shortage in the United States could increase demand for services at Walgreens clinics.

 

  • Walgreens is well poised to take advantage of retail trends; it operates smaller stores in urban areas, and it operates small-box discount stores, a growing area of U.S. retail.

 

  • The trend towards neighborhood shopping and decreased car use benefits Walgreens’ urban stores.

 

  • Increased online shopping means that people are making more purchases of smaller items such as household supplies and prescriptions at neighborhood stores because they are making fewer trips to malls and big box stores. This benefits Walgreens and its neighborhood locations.

 

  • Walgreens’ locations could serve as a pick up and drop off point for online purchases and returns, which could drive more foot traffic.

 

  • Walgreens could enter the fast-growing same day delivery market with prescriptions. It is already experimenting with delivery in California.

 

  • Walgreen could give itself float and a guaranteed customer base by buying a prescription benefit plan or merging with an established one such as Express Scripts.

 

  • There could be more opportunities for expansion by acquisition in the United States.

 

Threats

  • Expansion of CVS, which has purchased Target’s pharmacy operations and is moving into more U.S. markets, such as Denver.

 

  • The growing presence of U.S. supermarket operators such as Kroger in the pharmacy market. Kroger (NYSE: KR) is now the fifth largest U.S. drugstore company, with 2,111 pharmacies. Kroger’s business is growing fast; it opened 55 Little Clinics in 2014, and it just purchased Roundy’s, which operates 101 pharmacies in Wisconsin and Illinois.

 

  • Kroger’s loyalty card program, which gives customers a discount on fuel for purchasing prescriptions, is a major draw for new customers.

 

  • Growing centralization of U.S. health care. Three companies—Express Scripts, CVS and UnitedHealth—now control around 70% of the prescription benefit plans in the United States. Those companies could have the potential to dictate prices and business practices to Walgreens.

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  • Potential of cutbacks in government-subsidized health insurance could reduce Walgreens’ potential revenue.

 

  • High price of drugs could lead to demands for price controls and other measures that could affect Walgreens’ profits.

 

  • Walgreens’ size could lead to demand for antitrust action in the United States, where suspicion of corporations is growing and becoming a popular political issue.

Despite the threats, Walgreen Boots Alliance is in a great position because of its revenue growth. This company has become both a healthcare giant and a massive revenue generator. The question investors need to ask is, will those revenues actually lead to higher profits or not?