With Drugstore.com, Walgreen Eyes $44 by Focusing on Retail Pharmacy Biz
Walgreen (NYSE:WAG), the leading drugstore chain with more than 8,210 locations across the U.S, has been lately transforming itself to realign its strategy to focus on its core retail pharmacy business. It recently divested its pharmacy benefit management business Wellness Health Initiatives to Catalyst Health Solutions and acquired drugstore.com in March 2011. With the drugstore.com acquisition increasing its unique visitors by 50%, almost 3x CVS Caremark, Walgreen is thus well placed to further leverage its dominant position in the drug e-commerce space. Walgreen competes with the other leading pharmacy services provider CVS Caremark (NYSE:CVS) and Rite Aid (NYSE:RAD). 
We value Walgreen with a $44 Trefis price estimate of its stock, which is a 30% premium to the current market price.
View our detailed analysis for Walgreen.
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Technology and Retail Presence a Win Win for Walgreen
Walgreen is already the leader in U.S.’s online retail pharmacy business with 8 million unique monthly visitors at walgreens.com compared to 4.6 million for CVS Caremark and 4 million for Drugstore.com (reported February 2011). The drugstore.com acquisition will thus increase its unique visitors by 50%, almost 3x its strongest competitor CVS Caremark. Walgreen is thus well placed is further leverage its dominant position in the drug e-commerce space.
Forrester Research expects 50-55% of total sales, including drug sales, to be online or web-influenced by 2014. Drugstore.com acquisition brings Walgreen substantial online business in excess of half a billion dollars and fits with Walgreen’s retail-focused growth strategy.
Apart from access to drugstore.com’s monthly 4 million unique visitors, Walgreen will especially benefit from the 60,000 products that drugstore.com sources directly from the vendors through the relationships developed over time. So, the acquisition will not only increase the number of online shoppers but will also increase sales per visitor at walgreens.com due to the expanded product offering.
In addition, Drugstore.com rewards loyal customers with a 5% credit every time they shop for eligible products, and so Walgreen can leverage this to drive additional loyalty from its customers to drive repeat sales and higher ticket sizes.
Further, its attempt to offer 1-hour in-store pick up from its 8,200 strong in-store network (which covers 63% of the population within a 3 miles radius of its stores) with quick access to prescriptions will also differentiate it from other online drug retailers.
Walgreen has also relaunched its iPhone app that allows users to order prescriptions on the go and have them ready for in-store pick-up.
Fills One in Five Prescriptions
Walgreen’s prescription business has been growing at 2-3% ahead of industry growth and its retail prescription market share recently crossed 20%. It increased from 18% to 20% within the last two years, benefiting from the addition of 450 new drugstore sand acquisitions of Duane Reade and drugstore.com and we expect it to further increase to 22% over the next five years.
We wrote about it in a recent article Walgreen Heads to $44 with Prescriptions Business Growth.
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