Value investors will wonder if Walgreens Boots Alliance (WBA) is a super bargain because Mr. Market paid $24.26 for its shares on 4 January 2024.
Yet the company claims to operate over 12,500 drugstores in eight countries. Its holdings include over 8,700 retail locations in the US and Puerto Rico. Plus, WBA owns two of the world’s best-known pharmacy brands, America’s Walgreens and Britain’s Boots.
Thus, Walgreens Boots Alliance has a giant retail footprint. Its stores are everywhere and tens of millions of people rely on Walgreens for prescriptions. Furthermore, taxpayers and insurance companies pay for many WBA purchases. Therefore, WBA should be recession proof, but is it?
Is Walgreens Boots Alliance (WBA) making money?
Walgreens (WBA) is losing money. It reported a quarterly net loss of -$180 million on 31 August 2023. However, the net loss shrank from -$415 million on 31 August 2022.
Conversely, Walgreens Boots’ quarterly revenues rose from $32.45 million on 31 August 2022 to $35.42 billion on 31 August 2023. Notably, Walgreens had a -0.51 net profit margin on 31 August 2023.
Walgreens’ operations generate some cash. It reported $1.04 billion in cash from operations and a $2.95 billion free cash flow on 31 August 2023. Google Finance estimates WBA’s cash shrank by -$261 million between August 2022 and August 2023.
What Value does WBA offer?
Similarly, WBA had $739 million in cash and short-term investments and $96.63 billion in total assets on 31 August 2023. Hence, Walgreens has less cash.
Yet it is gaining some value. WBA’s total assets grew from $90.12 billion on 31 August 2022. Google Finance estimates the total assets grew by 7.22% between August 2022 and August 2023.
Meanwhile, Walgreens’ liabilities grew by 14.11% from $59.72 billion on 31 August 2022 to $68.14 billion on 31 August 2023. Predictably, Walgreens pays a lot of debt. It reported -$1.46 billion in cash from financing on 31 August 2023. The cash from financing grew by 35.17% between August 2022 and August 2023.
Mr. Market thinks Walgreens offers less value. For example, its share price fell from $37.49 on 4 January 2023 to $24.26 on 4 January 2022.
Why is Walgreens (WBA) losing value?
I suspect intense competition from aggressive retailers in WBA’s largest market, the United States, is eating into its business.
In America, Walgreens faces intense competition from the nation’s three largest grocers; Walmart (WMT), Kroger (KR), and Costco (COST). For example, America’s largest grocer, Walmart, claimed to operate 4,600 US pharmacies in August 2023, Talk Business reports.
Meanwhile, America’s largest standalone grocer, Kroger, claims to operate 2,252 US pharmacies. Kroger also claims its pharmacists fill 310 million prescriptions a year.
The fast-growing grocer Costco Wholesale (COST) operates 600 stores in 47 US states and Puerto Rico. Each of those stores contains a pharmacy.
The Costco (COST) Menace
Walmart, Kroger, and Costco threaten Walgreens in the same way. They eliminate the need for a separate trip to a drugstore. A busy soccer mom can pick up her family’s prescriptions while she shops for groceries. This eliminates the need for a shopping trip and a wait at the pharmacy.
Moreover, the Saturday Costco, or Walmart, run is now the only shopping trip many middle-class families make. Hence, shopping habits are changing. For example, Costco’s quarterly revenues by 6.18% between November 2022 and November 2023. Rising from $54.44 billion to $57.08 billion.
Another problem is Costco’s membership. People pay $120 a year for a Costco Gold Membership or $60 for a Gold Star Membership. The membership fee is a powerful incentive for members to use Costco’s pharmacies.
Around 58% of Americans identify as Costco members, GoBankingRates claims. The percentage of Costco members rises as people age and are more likely to get prescriptions.
For example, 55% of Americans age 45 to 54, 54% of Americans 55 to 64, and 60% of those over 60 identified as Costco members, Yahoo! Finance estimates. Thus, Costco appeals most to Walgreens’ best customers: older people.
The Amazon (AMZN) menace
I think Amazon (AMZN) is a greater threat to Walgreens. For example, Amazon now offers RxPass, a $5 a month basic prescription service, to Prime members.
RxPass users can get 60 generic prescriptions delivered free, ABC News claims. Amazon claims those prescriptions treat over 80 common ailments.
Amazon Pharmacy is open seven-days a week and 365 days a year. Moreover, you can access Amazon Pharmacy on your phone or computer anytime. Finally, Amazon Pharmacy, like Walmart, Costco, and Kroger, eliminates the need to go to the drugstore. A trip to the drugstore can be an unpleasant experience.
There were 167 million Amazon Prime members in the US in October 2023, Statista estimates. Those people are used to ordering almost everything from Amazon. I think Amazon is already destroying Walgreen’s health and beauty business. Now it is coming for prescriptions.
Like Costco, Amazon Prime obligates people to buy with a $14.99 a month subscription fee. This creates a powerful incentive for people to use every service Amazon offers.
Is Walgreens’ Business Model Obsolete?
Thus, many people will wonder if Walgreens’ business model is obsolete. That model is relying on customers to come to it.
Today’s customers want convenience. Instead, they want services such as pharmacies to come to them. Costco, Walmart, and Kroger place pharmacies where people shop. Amazon goes even farther by putting the pharmacy on your phone.
Consequently, I think Walgreens’ business will keep shrinking as its competitors. Thus, I predict Walgreens will keep losing value and closing stores for the foreseeable future. Value investors will avoid Walgreens as it shrinks.
*https://www.foodindustry.com/articles/top-10-grocers-in-the-united-states-2019/#gsc.tab=0
*https://talkbusiness.net/2023/08/walmart-pharmacists-now-treating-some-ailments-in-stores/
*https://talkbusiness.net/2023/08/walmart-pharmacists-now-treating-some-ailments-in-stores/
*https://investor.costco.com/company-profile/default.aspx
*https://finance.yahoo.com/news/why-42-americans-not-costco-110036276.html
*https://pharmacy.amazon.com/rxpass
*https://www.statista.com/topics/4076/amazon-prime/#topicOverview
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