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Stock Analyst Update

Will Walgreens' Plan for Sales Growth Work?

The retail pharmacy is pursuing a three-pronged strategy in an attempt to adapt in a rapidly shifting market.


 Walgreens (WBA) reported an in-line quarter, with moderate revenue growth and flat profit expansion. These results fall within our expectations, and we are reiterating our $70 fair value estimate. The firm is dealing with a rapidly shifting pharmacy retail market as a fundamental change takes hold throughout the entire U.S. healthcare ecosystem. Given the increased power of pharmacy benefit managers, retail pharmacies have had to contend with lower reimbursement and profit challenges as a result. To contend with the pressured operating environment, Walgreens’ management team has implemented a strategic plan intended to drive total sales volume and shift sales toward beauty/cosmetic products. The retail pharmacy is seeking to offset profit and growth pressure for its pharmacy operations with increased sales from other products. It is also trying to scale its centralized/fixed costs through higher volume. The firm plans on executing this strategy through three major tactics:

  • Partnering with PBMs to discount drugs in order to become a preferred pharmacy in many PBM retail networks.
  • Driving investment into its beauty/cosmetic operations to skew sales to higher-margin products and become a primary destination for consumers of these products.
  • Acquire Rite Aid to maximize U.S. market share.

We believe there is a strong likelihood of Walgreens driving sales volume and scale through becoming a preferred PBM pharmacy and enhancing its presence in many underpenetrated regions through the acquisition of Rite Aid. If Walgreens can capture the synergies of these two tactics, it could offset secular industry headwinds. However, we are far less confident in a positive outcome for its health/beauty push. From our perspective, U.S. consumers may not view a retail pharmacy as a top destination for cosmetics where high-end specialty and department stores dominate the space. 

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Vishnu Lekraj does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.