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Stock Analyst Update

Walgreens: Volume-Through-Discounting Plan in Force

The no-moat retail pharmacy is doing an excellent job of offsetting gross profit headwinds by decreasing SG&A as a percentage of sales.


 Walgreens Boots Alliance (WBA) reported first-quarter results that fell in line with our long-term outlook for the retail pharmacy, and we are reiterating our $73 fair value estimate and no-moat rating. The company has sought a strategy of driving volume by positioning itself as a preferred pharmacy for many major pharmacy benefit manager networks. While this move has significantly increased prescription volume and pharmacy sales, it has also led to lower gross margins. For the quarter, gross margins fell 109 basis points to 23.88%. To offset the gross profit headwinds, the firm has sought to decrease its selling, general, and administrative cost margin, and it did an excellent job on this front for the quarter. Total SG&A as a percentage of total sales decreased 73 basis points to 19.22% and was largely driven by the Retail Pharmacy USA division, which reported an impressive 127-basis-point decrease in SG&A cost margin to 19.22%. We believe it is essential that this trend continue, especially given the firm’s preferred-pharmacy strategy and push to gain share in the competitive U.S. cosmetics market.

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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.