Is Walgreens losing Money?

Many people are asking is Walgreens losing money, because the drugstore giant could close 400 stores in two countries.

Walgreens Boots-Alliance (NASDAQ: WBA) plans to close 200 of its 9,560 stores, Fortune reports. In addition, WBA will close 200 Boots-Alliance drugstores in the United Kingdom.

Conversely, Walgreens revenues grew slightly in the last quarter. In detail, Walgreens reported revenues of $34.528 billion on February 28, 2019, and $34.591 billion on 31 May 2019.

Moreover, Stockrow gives Walgreens a 0.75% revenue growth rate for that quarter. However, last quarter’s revenue growth rate is down from 4.56% Walgreens reported on 28 February 2019.

Is Walgreens Making Money?

However, Walgreens is making less from money from its drugstores. For example, Walgreens reported an operating income of $1.218 billion on 31 May 2019, down from $1.518 million three months earlier.

Additionally, Walgreens’ gross profit fell from $7.755 billion in February 2019 to $7.755 billion in May 2019. Meanwhile, the net income fell from $1.156 billion to $1.025 billion in the same period.

Oddly, Walgreens is generating more cash. Specifically, its operating cash flow grew from $735 million on 28 February 2019 to $2.02 billion on May 31, 2019. Impressively, Walgreens-Boot Alliance’s free cash flow grew from $412 million on 28 February 2019 to $1.567 billion on 31 May 2019.

Given these numbers, I think Walgreens looks like a value investment because it is generating more cash, from less revenue. However, Walgreens’ cash resources are small; the company reported $839 million in cash and short-term investments on May 31, 2019.

Why is Walgreens Closing Stores?

Consequently, Walgreens is shrinking its store footprint because its ability to generate revenue is shrinking. Effectively, Walgreens is making less money from its stores.

There are several explanations for Walgreens’ revenue shrinkage. First, Walgreens has too many stores. Currently, Walgreens reports operating 9,560 stores in the United States. In fact, Walgreens operates 820 stores in one state Florida.

Operating all those stores is expensive. To elaborate, each Walgreens store needs a highly paid pharmacist. For example, the average pharmacist in Nashville, Tennessee makes $118,511 a year, PayScale estimates.

Moreover, the average pharmacists’ salary in the United States in 2017 was $124,170 in 2017, USA News & World Report estimates. In fact, the lowest paid 25% of pharmacists make an average of $110,310 a year.

Thus, I estimate Walgreens face a payroll of $1.87 billion a year for employing one pharmacist at each of its drugstores. Since, Walgreens probably employs several pharmacists at each store, thus the actual number is undoubtedly far higher.

Under these circumstances, Walgreens can save a lot of money by closing a few hundred stores. To demonstrate, Walgreens could save $24.834 a year by getting rid of just two pharmacists–if those pharmacists make the average annual salary of $124,170.

Can Walgreens Make Money from Drugstores?

Second, Walgreens faces gigantic and aggressive competitors that can tap other huge streams of income.

In detail, Statista lists America’s six largest pharmacy operators in 2018 as:

  1. CVS Health–with 24.2% of the market.
  2.  Walgreens–with 17.5% of the market.
  3. Cigna/Express Scripps Inc.–with 11% of the market.
  4. The United Health Group (OptimumRX)–with 6.1% of the market.
  5. Walmart–with 4.9% of the market.
  6. Kroger—with 3.2% of the market.

Walgreens’ biggest direct competitor CVS Health (NYSE: CVS) now owns a major health insurance company Aetna. In addition, CVS is a major provider of prescription drug plans. Meanwhile, the UnitedHealth Group (NYSE: UNH) and Cigna Corp (NYSE: CI) are major health insurance companies.

Can Walgreens Compete with Big Insurance and Walmart?

Consequently, CVS, UnitedHealth, and Cigna can tap the float from insurance premiums. To explain, the float is all the cash people send insurers when they pay their premiums each month. Since employers automatically take many Americans’ health insurance premiums from their paychecks, it guarantees float income.

Meanwhile, Walgreens must wait for insurance companies or the government to reimburse it for most prescriptions. However, Walgreens must cover expenses like rent, payroll, utilities, and insurance each month.

Moreover, Walmart (NYSE: WMT) and Kroger (NYSE: KR) are giant discount retailers that use prescriptions as a loss leader to attract foot traffic. Kroger and Walmart management do care if the pharmacy loses money, because the pharmacy customers will probably buy other stuff in their stores.

For example, a grandfather might buy a gallon of motor oil, a chainsaw chain, and a few bags of groceries when he picks his prescriptions up at Walmart. Plus, Jane could buy milk and a pizza for dinner when she picks up her prescriptions at Kroger or King Soopers. Kroger and Walmart make money because grandfather and Jane have to pay for the other purchases with cash or credit cards.

How Amazon Threatens Walgreens

Third, Walgreens faces an aggressive and gigantic competitor that only dabbles in pharmacies, Amazon (NASDAQ: AMZN).

Amazon’s pharmacy business is tiny but the Everything Stores sells a wide variety of merchandise, Walgreens carries. Amazon sells make-up, toiletries, toilet paper, cleaning supplies, laundry detergent, personal care products, haircare products, and razors for instance.

Meanwhile you can get free shipping on all that stuff by paying $12.99 a month for Amazon Prime. Currently, Statista estimates there are 103 million American Amazon Prime subscribers.

Under these circumstances, a growing number of people go to Walgreens only for prescriptions. Thus, Walgreens only sells the expensive product it may not get paid for. Or not be paid for months.

This development could force Walgreens to close underperforming stores. In particular, it could force WBA to close drugstores in middle-class areas where people are more likely to be Prime members. Consequently, Walgreens could only operate drugstores in low-income neighborhoods which leaves its future in doubt.

How Brexit Threatens Walgreens

Fourth, Walgreens Boots Alliance (NASDAQ: WBA) has heavy exposure to the Brexit catastrophe with 2,485 pharmacies, 618 opticians, and 503 Boots Hearingcare locations in the UK.

Meanwhile, the United Kingdom’s gross domestic product shrank by 0.2% in 2nd Quarter 2019 as the pound sterling fell to a new low of $1.08 against the US dollar on 9 August 2019, Pound Sterling Live reports. Observers and speculators blame Brexit for the pound’s losses. Conversely, Google calculated the pound to dollar exchange rate at $1.21 on 12 August 2019.

Greater economic chaos in the UK is likely because of Prime Minister Boris Johnson’s insistence on a no-deal Brexit. To explain, in a No-Deal Brexit, Britain simply walks away from the European Union (EU) with no plans to deal with new realities like trade or customs. The worst-case scenario is a halt of trade, economic collapse, and the breakup of the United Kingdom.

Can Walgreens Survive without the UK?

Given those realities, and a weak pound, the Eurozone will become very attractive to the Scotts, Northern Irish, and potentially the Welsh. To clarify, the EU could soon offer those peoples something the UK may soon lack a strong currency, the Euro.

Interestingly, Northern Ireland, Scotland, and Wales, have their own parliaments and the ability to leave the United Kingdom. In fact, some British observers like The Guardian’s Simon Jenkins think Scottish Independence is inevitable. Scottish Nationalists control most of Scotland’s seats in Parliament.

Personally, I cannot see how Walgreens-Boots Alliance can make money if the United Kingdom and the National Health Service collapse or breakup. A likely scenario is that the European Union could end up running the National Health in Scotland, Wales, and Northern Ireland. Nobody knows how that could affect WBA.

Is Walgreens a Value Investment?

Thus, Walgreens needs to consider a future without Boots-Alliance. However, I think Walgreens could be a value investment under these circumstances.

To explain, the American business could remain profitable if the British business collapses. Meanwhile CEO Stefano Pessina could protect Walgreens by spinning Boots Alliance off as a separate business.

Moreover, WBA could remain profitable if the worst-case Brexit scenarios do not play out. Thus, Walgreens could be a value bargain now. For instance, Walgreens shares were cheap at $51.86 on 12 August 2019, yet the company makes money.

Is Walgreens a Good Dividend Investment?

Plus Walgreens is paying a nice growing dividend. In fact, the Walgreens dividend grew from 44₵ on 12 June 2019, to 45.75₵ on 12 September 2019. Thus, Walgreens’ will grow by 1.75₵ over summer 2019.

Impressively, credits Walgreens with 43 years of dividend growth. Walgreens shareholders were receiving a dividend yield of 3.53%, an annualized payout of $1.83, and a payout ratio of 30.6% on 12 August 2019.

I think those who buy WBA now could receive a pleasant surprised. The company is cheap; it makes money; it pays a good dividend, and greatest threat to it; Brexit, is potentially theoretical.

What Future could Walgreens Have?

Finally, the prospects for Walgreens’ future could be brighter than cynics think. In fact, there are some interesting growth opportunities in the United States.

The greatest opportunity for Walgreens is in health insurance. Walgreens could merge with a health insurance company like Humana (NYSE: HUM) or buy a health insurer. Importantly, Walgreens and Human are experimenting with a joint health clinic for seniors called Partners in Primary Care, Forbes reports.

Partners in Primary Care’s focus is the growing Medicare market. Currently, the Henry J. Kaiser Foundation estimates there are 59.869 million Medicare beneficiaries in the United States.

Is Delivery the Future of Walgreens?

Another interesting Walgreen partnership is with Kroger. Notably, Walgreens is experimenting with pickup of Kroger grocery orders in stores in Kentucky.

This experiment could expand nationwide as Kroger grows its delivery business with help from Ocado Group PLC (LON: OCDO) and Instacart. Kroger and Ocado are planning 20 robotic fulfillment centers across the United States to support grocery orders. Plus, Kroger plans to offer Instacart delivery from 1,600 of its 2,764 supermarkets, Supermarket News claims.

These experiments point to two interesting futures for Walgreens. First, Walgreens stores could serve as a drop off and pickup point for Amazon, Walmart, Instacart, and other orders.

Notably, Kohl’s (NYSE: KSS) now offers free Amazon returns in its stores. Such pickup could drive foot traffic while reducing expenses because Walgreens could reduce the number of people it employs and the amount of merchandise it stocks. Plus, Walgreens could shrink footprints and reduce real-estate costs.

The Walgreens of the Future May not be a Drugstore

Second, Instacart, Amazon, or even GrubHub (NYSE: GRUB) could deliver Walgreens pharmacy orders. Thus, the Walgreens of the future could be just a pharmacy or a pharmacy inside a larger store such as a Kroger Market Place supercenter.

Thus, the Walgreens of the future may not be a drugstore. Instead, the future Walgreens will only be a pharmacy.

In addition, Walgreens could serve markets from a few large regional pharmacies instead of dozens of retail locations. No retail locations will be necessary because they will deliver all prescriptions. An advantage to this strategy is that Walgreens could locate the big regional pharmacies inside fulfillment centers or in the warehouse districts where the rent is cheaper.

In the final analysis, Walgreens Boots Alliance (NASDAQ: WBA) is a good value investment that faces some interesting challenges. If Walgreens survives its stock could be a moneymaker for decades to come.