|
|
Topic
Top news source/blog that we're missing
Why do you recommend this news source?
|
||
Walgreens (NYSE:WAG) is U.S. pharmacy services provider and sell drugs (both prescription and over-the-counter) and retail merchandise (cosmetics, convenience foods, photo processing services, seasonal merchandise). It provides straight-to-home pharmaceutical services like prescription fulfillment through mail-order, telephone, or internet.[1] The company expands constantly and operated 6,443 retail locations in the U.S. in 2008, a 9.5% increase from 2007. [2]
Walgreens benefits from the aging baby boomer population. The elderly is a demographic that is especially important to pharmacies like Walgreens due to their increased medical expenses. In addition, the increased demand for generic drugs have the dual benefit of being cheaper for consumers (i.e., higher demand) and generate higher gross margins for Walgreens and the rest of the pharmaceutical retail industry.
The growth path is not all clear sailing for the drugstore giant, however. As with many industry sectors with strong growth prospects, pharmaceutical retail has attracted daunting competitors outside of the traditional drugstore retailers, most notably in the form of Wal-Mart. The behemoth omni-retailer announced that it would undercut pricing on generic drugs by as much as 50% compared to Walgreens, which may ignite a price war and put compounded pressure on the company's drug margins and front-store sales; Walgreens makes higher margins on beauty products, snacks, etc. and depends heavily on cross-category sales from those who come in to fill prescriptions. In addition, the U.S. government enacted Medicare legislation which reduced the reimbursement on prescription drugs supported by that program. Further cuts in Medicare spending would add to the margin squeeze for the company.
In FY2008, Walgreen's sales grew 10% from $53.8 billion to $59.0 billion. [3] This places the company behind CVS Caremark Corporation (CVS)'s $76.3 billion in FY2007 revenue, and this gap will likely grow with the 2008 CVS acquisition of Longs Drug Stores (LDG). [4]
[edit] Business Operations
Started more than a century ago, Walgreens had revenues of $59.0 billion in 2008.[5] The company operates 6,443 pharmacies, in addition to 491 other operations locations and 183 "convenient care clinics" through its Take Care Health Systems subsidiary, in the U.S. and Puerto Rico as of June 2008. [6] [7]. In fiscal 2008 Walgreens added 561 retail locations to its operations, growing by 9.5%. However, Walgreens announced that it will slow its planned increases in 2009 and 2010 to 6% and 5% increases in stores, respectively.[8]
The company has grown mostly through organic efforts of opening freestanding stores, which comprised 84% of all stores in 2005 compared to only 31% in 1995. Its acquisition of the 76-store Happy Harry's chain has been the only significant acquisition in the past 15 years.
- Pharmacy Retail (75% of sales): Walgreens is one of the largest U.S. chain drugstore by sales and profits, and the company Walgreens depends on its retail pharmacies to bring in a large percentage of the companies revenue. In fiscal 2008, Walgreens derived about 65% of its sales from prescription drugs and 10% of its sales from non-prescription drugs, unchanged from 2007. [9]
- Front Store Operations (25% of sales): This segment includes general merchandise such as cosmetics, toiletries, household items, food, beverages and photofinishing.[10] The typical Walgreens retail outlet devotes more square footage to its front-end compared to rivals such as CVS/Caremark and Rite Aid (RAD).[citation needed] With a higher mix of consumables than its competitors, Walgreen’s front store serves as a convenient alternative to supermarkets. Additionally, Walgreens' private brand sales now comprise approximately 20% of front-end merchandise, up from 12% in 2000 [11]
[edit] Business Growth
Walgreen's revenues increased 10% in FY2008 to $59.0 billion. Prescription drugs comprise 65% of this revenue, with the rest coming from generic drugs (10%) and front-end sales (25%). Net earnings increased 5.7% to $2.16 billion. This increase was driven by approximately equal increases in all three sales categories, whose fractions of revenue remain virtually unchanged between 2007 and 2008. [12]
Q1 2009 (Sept - Nov 2008) will also likely be strong, according to the company. From the November revenue report, total revenues were up 3.7% for the month, and sales of generic drugs increased (which lowers overall sales but increases profits because of higher profit margins on generics). [13]
[edit] Quarterly Business Financials
Walgreen's revenue decreased 6.7 percent to $640 million in Q2 (ending February 28th, 2009), a drop from $686 million the previous quarter. First half net revenue decreased 8.2 percent to $1.05 billion versus last year's $1.14 billion. Such losses were driven mainly by Walgreen's Rewiring for Growth restructuring program. Despite these losses, Walgreen's sales increased by 7% to a record $16.5 billion and sales by comparable stores grew by 1.3%. By the end of this quarter, Walgreen's had opened or acquired 57 drugstores for a net gain of 48 stores after relocations and closings. In the first half of the fiscal year, Walgreens opened or acquired 269 stores, compared with 282 in the year-ago period, with a net gain of 235 stores after relocations and closings.[15]
[edit] Trends and Forces
[edit] Aging Population
An aging American segment, known as baby boomers, continues to fuel an increase in demand for prescription drug sales. The American Association of Retired Persons (AARP), reports that while people in the 25-54 age group fill between 5 and 12 prescriptions each year, people over the age of 55 fill between 19 and 24 prescriptions and spend much more of their disposable income on drugs. [16] As this generation of boomers gets older, chain drugstores will experience an increase in prescription sales for the next 10+ years.
[edit] Medicare Part D and Medicaid
2007 government cuts in Medicaid and the introduction of Medicare Part D in January of 2006 affect pharmacies like Walgreens a lot. While Medicare Part D has 22 million enrollees (many of whom who were previously uninsured)[17], many of these used to be Medicaid patients. Medicaid reimburses more for drugs than Medicare, so cuts in the former and increases in the latter have resulted in two competing effects on pharmacies: more customers but lower margins. While revenues have continued to increase, Walgreens did report in 2008 a decline in pharmacy margins for senior prescriptions as millions of cash payors continue to enroll in Medicare Part D.[18]
[edit] Generic Prescription Drugs
The retail drugstore industry will benefit from accelerated generic prescription drug sales, as a significant number of branded drugs will come off patent between 2006-2009. While generic drugs have a lower price points, margins for these products tend to be higher for drug retailers. [19]
[edit] Threat of Mail-Order Pharmacies
Mail-order pharmacies pose a threat to physical drugstores, due to the lower consumer prices for prescription drugs. Mail-order pharmacies is the the fastest growing retail pharmacy business, and currently comprise about 19-20% of total U.S. prescription sales. [20] Walgreens does have their own pharmacy benefit management (PBM) services, allowing the company to offer their large customer the option of migrating towards mail order pharmacy.
[edit] Competition
Drugstore competitors to Walgreens, which realized $53.7 billion in 2007 revenue, include:
- CVS/Caremark (CVS) generated $76 billion in combined sales for 2007. CVS is the largest drugstore retailer, CVS also has its own PBM business. Walgreens lags CVS in terms of market capitalization but has historically led in revenue and operating margins in until 2007. However, CVS's sales and profits grew significantly when CVS completed its merger with Caremark, a leading PBM provider, in March 2007 as a part of its recent acceleration of its physical and geographical expansion. The company continued to aggressively expand in 2008 with the acquisition of Longs Drug Stores (LDG), which will raise revenue further. In 2007, CVS reported a 6.2% operating margin on its $76.3 billion in sales.
- Rite Aid (RAD) generated $17.5 billion in 2007 revenue. Rite Aid recently acquired Brooks/Eckerd on the East coast, but both companies are currently struggling. Walgreens could stand to benefit from their decline.
In addition to other drugstore retailers, Walgreens also competes for market share with supermarkets, convenience stores, mass merchants, Internet drugstores, and PBMs. Of late, supermarkets and mass merchants have lost considerable market share (currently at 12%) in the retail prescription business leaving a potential market share to be filled by Walgreens and its competitors.
In particular, Wal-Mart (WMT) has grown its retail pharmacy business at its retail mega-stores. Wal-Mart is the third largest domestic retailer in terms of pharmacy sales, and it has continued to increase the number of total pharmacies in its installed store base. Wal-Mart’s also announced a strategy to aggressively undercut prices of generic drugs compared to traditional drugstores such as Walgreens. Such actions may catalyze pricing wars, which would put significant pressure on drugstore retailer margins.
[edit] References
- ↑ Walgreens 10-K 2008. Section 1 - Business. pg 1
- ↑ Walgreens 10-K 2008. Section 1 - Properties. pg 4
- ↑ Walgreens 10-K 2008. Section 2 - Five-Year Summary of Selected Consolidated Financial Data. pg 1
- ↑ CVS Caremark 10-K 2007. Section 2 - Financial Statements and Supplementary Data. pg 32
- ↑ Walgreens 10-K 2008. Section 2 - Five-Year Summary of Selected Consolidated Financial Data. pg 1
- ↑ Walgreens 10-K 2008. Section 1 - Properties. pg 4
- ↑ Walgreen Co. (WAG) Press Release, June Sales Release 2008
- ↑ The Wall Street Journal Online, "Walgreen to Slow Expansion"
- ↑ Walgreens 10-K 2008. Section 1 - Business. pg 1
- ↑ Walgreens 10-K 2008. Section 1 - Business. pg 1
- ↑ [http://archives.chicagotribune.com/2008/mar/17/business/chi-mon-walgreen-wag-clothes-mar17| Chicago Tribune. "Walgreens shifts self-promotion, Private-label line grows, includes clothing. 17 March 2008."
- ↑ Walgreens 10-K 2008. Section 2 - Five-Year Summary of Selected Consolidated Financial Data. pg 1
- ↑ Walgreen Nov. same-store sales fall, estimates cut." 3 Dec 2008
- ↑ Walgreens 10-K 2008. Section 2 - Five-Year Summary of Selected Consolidated Financial Data. pg 1
- ↑ Walgreen's Second Quarter and First Half Earnings Report
- ↑ AARP report on Prescription Spending by People Age 65+"
- ↑ HHS Monthly Summary on Medicare Part D Enrollment. November 2008.
- ↑ Walgreens 10-K 2008. Section 2 - Results of Operations. pg 13
- ↑ Drug Channels. "The Attack on Generic Profits in Drug Channels." 21 November 2001.
- ↑ Nu-Retail.com "Exclusionary Practices in the Mail Order Pharmacy Market." 21 Sept 2005
- ↑ CVS Caremark 10-K 2007. Section 1 - Business. pg 4
- ↑ Market Wire. "BIGresearch Retail Ratings: CVS Closes Prescription Drug Gap With Walgreens." October 2008.
| ||||||
|
|
