Walgreens Boots Alliance

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 2/5

Walgreens Boots Alliance (WBA) is a global pharmacy, health and well-being company with a focus on retail and wholesale drug distribution, health and wellness services and products.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Walgreens Boots Alliance (WBA) operates through two main segments:

  • U.S. Retail Pharmacy: This segment includes retail drugstores, health and wellness services, specialty and home delivery pharmacies, and a digital platform. They offer prescription drugs, health and wellness products, and personal care items, serving a broad customer base across all US states, Puerto Rico, and the U.S. Virgin Islands.
  • International: This segment is mainly involved in retail and wholesale operations outside of the United States. Walgreens Boots Alliance operates through a variety of partnerships and companies, including Boots UK and Boots Ireland, international pharmacy and retail, the Pharmaceutical Wholesale division and Global Brands.

The company has a 170 year history and the core segment has been providing pharmacy and health services to communities for a long period of time.

Industry Landscape and Competitive Dynamics

  • Competitive Landscape: The pharmacy and healthcare market is highly competitive, with intense rivalry among major drugstore chains (CVS, Rite Aid, regional pharmacies), online pharmacies (Amazon Pharmacy, Capsule), drug wholesalers (McKesson and Cardinal Health), large retailers with pharmacies (Walmart, Costco), grocery stores with pharmacies (Kroger).
  • Retail Pharmacy: The U.S. retail pharmacy industry faces pressure from reimbursement rates, rising costs, and the growing popularity of online pharmacies and mail order drug delivery. Pharmacies are also increasingly offering front-end retail items and more services such as health consultations, vaccinations and so on.
  • Healthcare Segment: The industry is also facing significant structural changes due to the growth of healthcare organizations and consolidation within the healthcare market.
  • Wholesale Drug Distribution: The industry is driven by consolidation as large global players are buying smaller regional players, and there are very tight margins and contracts. This market is also driven by the growth of global healthcare spending.

What Makes WBA Different? While WBA is a major player, its differentiating factors are not very strong. It owns several well-known brands, but those are largely within the UK and European region. WBA’s U.S. operations are mostly focused on retail pharmacies and distribution. Unlike other players, WBA does not have a separate health insurance business. Furthermore, the integration with healthcare and tech is not as strong as its main competitors, and it does not have a strong presence in the fastest-growing areas of health care, such as health technology and specialty drugs.

Recent Developments

  • Transformational Cost Management Program: WBA is undergoing a major cost-cutting program with an aim to save over $3 billion. They are focused on a restructuring to streamline operations, close underperforming stores, reduce headcount, and optimize digital. They have incurred charges of $4.5 billion in the previous quarters related to this program.
  • Sale of Investments: The company has sold off equity stakes in several different companies to pay off debts and to improve the balance sheet. The company expects continued losses from these sales for the foreseeable future.
  • Strategic Focus on Healthcare: The company is increasingly pivoting towards healthcare services and has made several acquisitions of clinics and home care providers. In addition, the company is looking to invest more heavily in data and analytics to improve the healthcare operations.
  • New CEO: The company recently replaced its CEO, as Rosalind Brewer resigned her post and is now working with a new chief executive officer. The new CEO’s vision is to improve the operations and the performance of the company by strengthening its core business and focusing on profitability.
  • Financing and Debt: There has been a large increase in the company’s leverage to manage its funding needs and to maintain its capital returns programs. The total debt amount of the company is around $38.3 billion.

Financials in Detail

  • Revenues: WBA’s total revenues are around $132 billion per year. A majority of the company’s revenue comes from U.S. Retail Pharmacy operations (~78%), the rest are from the International segment. Revenue growth has been volatile across different segments. Revenues in U.S. Retail and International are quite similar, around $25.5 billion vs $31.1 billion.
  • Margins: The company has a very slim net profit margin. In 2022 its net income was 45 million, a very small percentage of its $132 billion revenues. The net income margin has also been volatile and has shown significant negative numbers over time. In 2022, its Gross Profit margin was around 21%, after significant operational expenses, this reduces the operating margin to around 2%. The operating margin is primarily driven by sales and distribution expenses and also administrative expenses.
  • Profitability: In the last few years, WBA’s profitability has been volatile and has been decreasing due to higher operational expenses and other factors, such as the write-offs related to the closure of unprofitable stores. Net Income in the recent past has been very low, around 110 million in 2023 after losses in the previous years.
  • Debt: Walgreens’ debt to total assets has been growing over time, particularly due to aggressive acquisitions and share repurchases. The current debt amount is $38.3 billion, or almost half of its total asset amount. This high leverage may prove problematic for the company during times of economic downturn. The debt-to-equity ratio for the company is very high and this has been concerning to investors and rating agencies.
  • Liquidity: The company’s liquidity is slightly questionable due to a high amount of debt. But the company has good cash flow from its operations to cover for its operating expenses, making it still unlikely to fall into financial difficulties. The company’s cash amount is $1 billion, while its current liabilities are around $24.4 billion. The low liquidity and high debt is concerning.

The company is heavily reliant on revenues from prescription sales. Pharmacy sales represent around 72% of total sales for the company, as such, a change in the industry relating to the prescription market has a big impact on profitability.

Moat Rating: 2 / 5 WBA has a narrow moat due to the following:

  • Brand: WBA owns several well-known brands (mostly in Europe), but its main operations (U.S. Retail Pharmacy) does not benefit significantly from strong brand loyalty. A change in price or service by competitors is often enough for people to switch.
  • Customer Switching Costs: WBA does not have a very strong level of customer stickiness. While people may keep going to the same pharmacy due to convenience, they do not have to pay extra to switch between stores. In general, most customers can very easily switch to a competitor by paying for their prescriptions or over-the-counter items, even to online retailers.
  • Economies of Scale: While WBA does benefit from having a huge store network and economies of scale for its distribution, the cost advantage in the U.S. pharmacy and retail sectors is quite small, and can be easily replicated.
  • Network Effect: This does not apply to WBA.

There are some minor sources of competitive advantage for the company such as: * Regulatory Licenses: For drug prescriptions and licenses, the regulatory environment for pharmacies creates a moat around their business, but they do not provide extra price control.

  • Scale-Based Cost Advantages: WBA does enjoy cost savings, due to large scale of its operations. However, this advantage is limited to operating efficiencies.

Risks to the Moat

  • Technological Disruption: The increasing prevalence of online pharmacies and telehealth poses a significant threat to WBA’s traditional retail pharmacy business. The changing business environment brought about by tech can reduce the profitability and dominance of WBA. The company has failed to properly implement digital and is behind its competitors in this regard.
  • Regulatory Changes: Healthcare is a very highly regulated industry and WBA operates in many different geographies. The changes in regulations, especially relating to reimbursement rates, pricing of drugs, or the way healthcare is organized, may have a large impact on the company and its business model.
  • Industry Consolidation: Increasing M&A among healthcare companies can lead to larger, stronger rivals, and increased competition. The trend of smaller pharmacies going out of business may increase competition for the existing players.
  • Changing consumer preferences: Younger generations may have very different preferences and may tend to use newer models like tele health and online pharmacies. Such structural changes may make the existing retail format of WBA obsolete.
  • High Debt and Volatility: The company’s high level of debt and increasing volatility in net income may put the company in a precarious position in the future. In addition, increased risk aversion by investors in the face of a crisis can lead to lower share prices.

Understandability: 2 / 5 WBA’s business is complex to understand due to the many different business segments and complex financials. The company has both U.S. and International operations, which are different in nature. Analyzing the company is complicated by different government regulations in its various areas of operations, and varying customer preferences between locations. Furthermore, their financial statements contain lots of complicated one-time and non-recurring items that must be thoroughly investigated to make a full judgment. Therefore, I give it a 2 out of 5 rating in understandability.

Balance Sheet Health: 2 / 5 WBA’s balance sheet has several red flags such as:

  • High Debt The company’s debt is very high, reaching $38.3 billion in 2023. This high level of debt reduces the ability for the company to take future strategic actions and may threaten its financial stability.
  • Declining Equity The company’s equity has declined dramatically over the years. This indicates the negative impact of acquisitions and poor results on its balance sheet. This is another sign of a company that has been struggling financially.
  • Poor Free Cash Flow The company has very volatile and often poor free cash flow results. This could be problematic for the company in its long term ability to pay for debt and to invest in new growth and other programs. I give it 2/5 in balance sheet health due to these reasons.

Conclusion

WBA is currently undergoing a major transformation, as it is actively trying to change its focus and improve performance and its financials. While WBA is a well-known company with a long operating history, it is not particularly well-positioned in the changing business environment. It has many challenges relating to competition and growth. The company’s current state suggests that it doesn’t have a moat as of now. It needs a great improvement to its operations and finances to be a lucrative investment.