How Are Walgreens’ Capital Expenditures Trending?

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Walgreens Boots Alliance

Walgreens Boots Alliance (NASDAQ:WBA) is undertaking a host of measures to counter the challenges of the rapidly changing pharmaceutical sector, to prepare itself for increased competition from other retailers and improve its operational efficiency. To this end, the company undertook a Cost Transformation Program which was aimed at reorganizing operations, improving information and technology services and enhancing operating efficiency. This program has generally been effective, as the company’s selling, general and administrative expenses declined from almost 23% of revenues in November 2014 to 20% in November 2016. However, the company’s capital expenditures have increased in the past two years. Below we look at how have the company’s capital expenditures have been trending.

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Currently, Walgreens has 12,871 stores, of which 8,185 are in the U.S. The company’s total store count is significantly higher than the 8,516 stores it had in 2012. But an important point to note is that the store count has increased significantly due to the acquisition of Boots Alliance, which helped the company establish a global footprint. Moreover, with the company already boasting a significant presence across the U.S., most of its capital spending has been aimed at improving store efficiency and upgrading its IT offerings. In the last fiscal year, the company’s store count increased by only 2. But at the same time, the company updated many of its existing stores and started newer offerings, which led to the rise in capital spending.

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Walgreens has also been trying to improve its online presence through its mobile app offerings. The company’s mobile app, available on all major platforms, primarily helps the consumers file prescriptions online. The app also contains a host of other features such as pill reminder notifications, transactions through insurance providers, chat with pharmacy professionals and doctors on call. These improvements are expected to help Walgreens strengthen its presence in the online domain, as more and more consumers prefer online shopping. [1]

Going forward, we expect the Walgreens’ capital expenditures to remain around current levels as a percentage of EBITDA (as well as revenue), but there is still a lot depending on the fate of its pending acquisition of Rite-Aid. The acquisition, proposed 15 months ago, is still awaiting the approval of regulatory authorities. If the acquisition goes through, we could see a change in the company’s capital spending plans since the number of stores under the company’s umbrella would see an appreciable increase. This may lead to significant restructuring and store consolidation, since the company would want to optimize the store count and minimize cannibalization.


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Notes:
  1. Walgreens’ latest mobile app update pushes beacons to shoppers, Business Insider, November 15 2016 []