Walgreens Faces Covid Headwinds and continues to push into Primary-Care Services

Business Strategy & Outlook:
Founded in 1901, Walgreens Boots Alliance is a leading global retail pharmacy chain. In fiscal 2021, the company generated approximately $133 billion in revenue and dispensed over a billion prescriptions annually, representing just under one fourth of the U.S. drug market. The firm’s nearly 9,000 domestic stores are strategically located in high-traffic areas and generate over $13 million per store, which drives scale and remains a critical consideration in an increasingly competitive market that has witnessed rationalization. The core business is centered on the pharmacy, which accounts for about three fourths of revenue and is considered the main driver of traffic. Despite Walgreens’ scale as a leading purchaser of prescription drugs and competitive advantage over smaller retail pharmacy chains, gross margins have come under pressure in recent years as a result of pharmacy benefit managers’ negotiating leverage and market power. These pressures have affected margins across the entire retail pharmacy industry, pushing the largest players (Walgreens, CVS, Walmart) to branch into other healthcare services.

Walgreens has been focused on leveraging scale to foster strategic partnerships to increase traffic and cross-selling opportunities, with a long-term focus to improve human health in general. While Walgreens has expanded into omnichannel offerings, but its high-traffic brick-and-mortar locations and convenience-oriented approach are less susceptible to pressures from e-commerce and mass merchandisers, particularly in the health and wellness categories, than other retailers. Historically, the company’s strategy was based on footprint expansion, but having established a scalable infrastructure, the focus has evolved and the concentration has shifted to improving store utilization and strategically aligning with healthcare partners to address the macro trend of localized community healthcare. The company’s partnership with VillageMD to establish primary-care clinics in select Walgreens locations further establishes the drugstore as a one-stop shop for care.

Financial Strengths:
As of March 2022, cash and equivalents stood at $2 billion, or lower than the company’s $4 billion in combined current debt and lease obligations. Beyond those current obligations, Walgreens owes $11 billion in long-term debt and $22 billion in operating lease obligations. The company continues to focus on its core assets and expanding in primary-care services. While cash levels appear low, the firm will be able to rebuild its cash balance through the normal course of business and free cash flow generation. For example, free cash flow generation was around $4 billion in fiscal 2021, and only slightly lower cash flows going forward even after pandemic conditions ease.

Bulls Say:
As a leading retail pharmacy with around 9,000 domestic locations, Walgreens is able to reach 80% of U.S. consumers.
Strategic partnerships focused on increasing store utilization through the addition of clinical partners to localize community healthcare should be a natural extension in providing coordinated care that will increase community engagement and offset reimbursement pressures.
An increase in higher-margin health and beauty merchandise sales bolsters front-end store performance.

Company Description:
Walgreens Boots Alliance is a leading retail pharmacy chain with about 13,000 stores in the U.S. and internationally. Walgreens’ core strategy involves brick-and-mortar retail pharmacy locations in high-traffic areas, with nearly 80% of the U.S. population living within 5 miles of a store. Currently, the company has a leading share of the domestic prescription drug market at about 20%. In 2021, the company sold a majority of its Alliance Healthcare wholesale business to AmerisourceBergen for $6.5 billion, doubling down on its core pharmacy efforts and ventures in strategic growth areas in primary care (VillageMD) and digital offerings. The company also has equity stakes in AmerisourceBergen (29%) and Sinopharm Holding Guoda Drugstore (40%).

(Source: Morningstar)
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