Is Healthcare Profitable at Walgreens?
In-store clinics might not be the profit center that some retailers believed. The highly profitable drugstore giant Walgreens-Boots Alliance (NASDAQ: WBA) is quietly pulling out of the clinic business.
The operation of 56 clinics in Chicago, Walgreens’ hometown, is being turned over to Advocate Healthcare, the largest clinic operator in Illinois, Fierce Healthcare reported. The clinics will stay, but they will be rebranded as Advocate Clinic at Walgreens. The Chicago Tribune went even further, stating that Walgreen was actually selling the clinics to Advocate.
This is the second time that Walgreen has partnered with a traditional healthcare provider to offer medical services in its stores. Last year it partnered with Providence Health & Services to set up 25 new retail clinics inside stores in Washington State and Oregon.
Why Is Walgreen Pulling Out of the Clinic Business?
It does not seem to be a coincidence that Walgreen is pulling out of clinic management when the media is full of stories about troubles at Theranos, a flashy Silicon Valley startup that was supposed to provide high-tech medical tests in stores. Walgreens was one of Theranos’ customers, and the testing company was supposed to be a lynchpin of its clinic strategy.
It looks as if Walgreens got burned by Theranos and is now going to take a more cautious approach to healthcare. Instead of operating clinics, it’ll rent space to them and let somebody else, namely hospitals or medical practices, take the risks.
Obviously, one of the greatest risks is a big malpractice lawsuit if something goes wrong at the clinic. The whole concept of clinics operated under a big retailer’s brand name seems like a personal injury attorney’s dream.
There is a great deal that can go wrong at a clinic, some of which can lead to injury, disability or death. It is also easier to win a big judgement against a big corporation than a hospital or a group of doctors.
Getting out of the clinic business transfers the liability to somebody else. It can also really improve the level of healthcare offered in the clinics because the nurse practitioners there can simply refer patients that need more involved treatment to the medical organizations or physicians they work with.
Transferring the Clinics Proves Walgreens Is a Good Company
Turning the clinics over to others proves Walgreens is a good company. It is getting out of a business far from its area of expertise, drugs and retail, yet doing it in a way that does not drive customers away.
The clinics will still be in the stores to service the community and draw in additional foot traffic to Walgreen. Walgreen will no longer have the expense of operating them or face the liability and public relations dilemmas that could arise from providing medical care. It also has a business model it can apply elsewhere to offer more clinics in the nation.
More importantly, Walgreen is now free to focus on the business where it is successful and profitable—drugstores and small box discounting. Walgreen is now America’s largest drugstore operator and one of its most successful small box discounters.
Walgreens Enters the Retail Big League
Walgreens has become one of the biggest success stories in retail since its merger with the European Boots Alliance. In particular, its revenue has been shooting through the roof.
In November 2014 Walgreen reported TTM revenues of $77.62 billion; by November 2015 that number had grown to $112.92 billion. That makes for an increase of around $35.3 billion a year, which puts Walgreen in the top five of American retailers in terms of revenue.
Based on the available financial data, America’s five largest publicly traded retailers in terms of revenue are below:
- Walmart Stores Inc. (NYSE: WMT): $484.03 billion on October 31, 2015
- CVS Health (NYSE: CVS): $149.2 billion on September 30, 2015
- Costco Wholesale (NASDAQ: COST): $116.55 billion on November 30, 2015
- Walgreen: $112.92 billion on November 30, 2015
- Kroger (NYSE: KR): $108.87 billion on October 31, 2015
Note: Safeway’s revenue might rival these, but it is currently privately held. Amazon (NASDAQ: AMZN) could also severely disrupt this list with its seemingly unlimited potential for revenue growth.
This means that Walgreen is very much in the retail big leagues, and it has not even taken control of Rite Aid (NYSE: RAD) yet. As I pointed out elsewhere, acquiring Rite Aid could give Walgreen nearly 13,000 locations in the USA and around $130 billion in revenue.
It also shows us why Walgreen does not need the clinics. The company has tremendous potential for growth without them. More importantly, the financial numbers show us that Walgreens is making a lot of money without clinics.
Walgreen Is Making a Lot of Money
The acquisition, expansion and revenue growth are definitely paying off for Walgreen Boots Alliance, which operates drugstores around the world. Some of the highlights of its earnings from November 30, 2015, include:
- A net income of $4.48 billion, which was more than double the $2.059 billion reported in November 2014.
- A profit margin of 3.82%.
- Cash and short-term investments of $2.57 billion. This number dropped significantly from $12.86 billion in November 2014, largely because of the Rite Aid acquisition.
- $5.365 billion in cash from operations as opposed to $4.971 billion in cash from operations in November 2014.
The Value in Walgreens
These numbers show us that Walgreens is a very profitable company with a lot of momentum that generates a lot of cash from its operations, but is it a good investment? The answer to that question seems to be yes; it offered shareholders a dividend yield of 1.83% and a return on equity of 15.49% on November 30, 2015.
Walgreens was also undervalued; it had a market capitalization of $82.36 billion and an enterprise value of $96.29 billion on February 3, 2015. If you are looking for a really good value investment in retail, Walgreens is well worth a look because it is not flashy but is making money. More importantly, it is a company with a management team that concentrates on the core business.
Given these numbers, one has to wonder if other companies such as Kroger and CVS Health will start pulling out of the clinic business too. It might be only a matter of time before in-store clinics will all be operated by healthcare providers and not retailers.
Please note that the blogger and writer owns shares of Kroger.
