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Robert Stephens, CFA
Robert Stephens, CFA
Articles (109) 

Why Walgreens Boots Alliance Has Growth Potential

The company appears to have a sound strategy

An improved strategy that focuses on enhancing the customer experience could boost the stock performance of Walgreens Boots Alliance Inc. (NASDAQ:WBA). The company is focused on increasing its investment in omnichannel capabilities, while introducing new store concepts as it expands its store estate.

Partnerships are set to increase its exposure to new markets, while also improving its competitive advantage. Recent acquisitions are expected to increase customer numbers, with synergies due to be at the top end of expectations.

Although the company faces competitive threats, its stock price could continue to outperform the S&P 500. Over the last year, it has risen 5% versus a 4% fall for the index.

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Strategy

An improved customer experience could catalyze Walgreens’ financial performance. It is investing in its omnichannel capabilities, with 22.5% of retail resource scripts initiated through digital channels in its most recent quarter. This is an increase of 2.4 percentage points versus the prior-year quarter. It is planning to expand its mobile self-checkout beyond its current trial in Gainesville, Florida, which will allow the 53 million customers who have downloaded its app to use it to pay in store.

The company is developing a new concept which is aimed at creating a neighborhood health destination store. This is part of a wider focus on differentiating its offering versus rivals. It is seeking to offer a wider range of health and well-being services that include an increasing focus on value proposition. In the most recent quarter, it opened 12 community-based specialty pharmacies, which increased the total number by 10% to 306 by the end of the fiscal year. A new cloud-based pharmacy platform is expected to improve the efficiency of the business and provide enhanced oversight for individual pharmacies.

Growth potential

A number of new partnerships are also set to enhance the customer experience, with the company’s next-day delivery partnership with FedEx (NYSE:FDX) now operating across 7,700 stores. It has also expanded its trial with Sprint (NYSE:S) to 80 more locations, with the company providing wireless services and expertise to Walgreens’ customers. Its beauty offering is set to be enhanced through its partnership with Birchbox. This provides customers with integrated access to Birchbox online via the Walgreens app and website.

A collaboration with Alibaba (NYSE:BABA) is also expected to increase the exposure of its beauty brands to Chinese consumers. The expansion of its partnership with LabCorp (NYSE:LH) is improving the customer experience within its pharmacies, and will be expanded from 17 to 600 locations over the next four years.

The integration of the acquired 2,186 Rite Aid (RAD) stores is progressing as expected, with favorable results being recorded on prescription volume retention. The acquisition is now expected to generate a total benefit from store optimization and synergies of over $650 million per annum, which is up from a previous forecast of $600 million. The acquisitions of Scripta and DaVita RX are expected to deliver high retention rates on script transfers, which will bring an increasing number of new patients into the company’s system.

Threats

Amazon.com Inc.'s (NASDAQ:AMZN) acquisition of online pharmacy business PillPack could threaten Walgreen’s market share in an increasingly digital industry. PillPack has pharmacy licenses across all 50 U.S. states and could provide a platform for Amazon to increase its market share at a time when the retail pharmacy industry is experiencing rapidly changing dynamics. The acquisition of health insurer Aetna by CVS Health (NYSE:CVS) could further increase competition within the industry. Its next-day drug delivery service forced Walgreens to respond by launching its own offering. Both companies could offer a range of new products and services since their parent companies have the financial resources to invest heavily over the long run.

In response to the threat from Amazon’s Whole Foods, which is offering increasingly flexible shopping experiences, Walgreens is ramping up its partnership with Kroger (NYSE:KR). It will rollout Kroger Express concepts, which will cover around a third of an average Walgreens store’s retail space. This represents the next stage of the pilot program between the two companies, with the concept offering 2,300 products that have been chosen through customer data and insights. The concept provides easy access to Kroger’s most popular brands, as well as a convenient shopping experience for customers. This is in addition to the ability for Kroger customers to order online and collect from Walgreens stores.

Outlook

An increased focus on improving the customer experience could catalyze the company’s stock performance. New store concepts alongside the opening of additional speciality pharmacies are expected to complement its increased investment in omnichannel services. A partnership with Alibaba could enhance its international growth prospects, while recent acquisitions are due to increase customer numbers as a result of higher retention rates.

The partnership with Kroger could help to counter the threat from Amazon. Other partnerships may further enhance the company’s competitive advantage at a time when the industry is undergoing rapid change. After outperforming the S&P 500 in the last year, the stock appears to have investment appeal.

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