How Walgreens Boots Alliance Gets To $141 Billion In 2020: Pharmacy Or Retail?

Walgreens Boots Alliance (NASDAQ:WBA) gross revenue grew 16% from $119.6 billion in 2016 to $139.0 billion in 2019, and it is estimated to be $141.7 billion in 2020. The growth will largely be driven by the company’s Pharmacy segment, which includes revenue from prescription drugs. Pharmacy segment revenue growth is expected to be 2.3x, as compared to Walgreens total revenue growth rate between 2016 and 2020. It is expected to be the single-biggest revenue driver with $80.0 billion in gross revenues (56% of Total Revenues), which is 2.1x the size of its second largest segment, Retail, with $38 billion expected revenue in 2020. Retail includes sales of over-the-counter (OTC) and other retail products.

Pharmacy segment will likely add $23.5 billion over 2016-20 (107% of $22 billion in expected revenue change. The figure is higher than 100%, as Retail segment has seen a revenue decline over the same period). Specifically, the Retail segment is expected to see a decline of $2.6 billion or -12% of $22 billion in expected revenue change between 2016-2020E.

Despite strong growth in the Pharmacy segment, the company’s stock price declined around 30% between early 2017 and end of 2019. This can be attributed to the pressure on the company’s Retail segment, primarily in UK, and a decline in its adjusted net income margin from 4.3% in 2016 to 4.0% in 2019. Though the company’s 17% top line growth and 15% decline in shares outstanding led to a 30% jump in adjusted EPS. In our interactive dashboard analysis, ‘WBA Revenues: How Does Walgreens Boots Alliance Make Money?’, we discuss the company’s business model, followed by sections that review past performance and 2022 expectations.

Walgreens’ Net Revenue Has Seen Steady Growth Over The Recent Years

• We arrive at Net Revenues after adjusting the gross revenues for eliminations, as certain revenue components are included in more than one segment.
• Walgreens’ net revenue grew from $117 billion in 2016 to $137 billion in 2019, and it is estimated to be $148 billion in 2022.

#1. Pharmacy Revenues Are Expected To Increase 14% Over The Next 3 Years

• Pharmacy segment revenues have grown from $56.5 billion in 2016 to $77.1 billion in 2019, and it is estimated to be north of $88.0 billion in 2022, led by growth in both, number of prescriptions, and average revenue per prescription.
• Number of retail prescriptions has seen 14% growth between 2016-2019, while average revenue per retail prescription grew 20% over the same period. We expect the same trend to continue and aid the segment revenue growth in the coming years.
• There has been a growth on drug spending over the recent years, due to new brands, high prices for existing drugs, and fewer patent expiries. Also, the expansion of Walgreens network will aid the revenue growth. The company added around 1,000 stores between fiscal 2016 and fiscal 2019.

#2. Retail Segment Will Continue To Face Pressure Due To Softness In UK Business

• Retail segment, which includes the company’s retail sales of prescription drugs, and consumer healthcare products, saw sales decline from $40.5 billion in 2016 to $38.8 billion in 2019, and it will likely decline to $37.8 billion in 2022.
• This can be attributed to the company’s UK business, which is facing increased competition from online retailers. As such, the company could close some of its stores in UK.
• No. of stores in the U.S. have increased from 8,175 to 9,285 between 2016 and 2019, while average area per store has declined from 10.9k to 9.6k square feet. Revenue per square foot has remained stable around $308.
• International stores declined slightly from 4,673 to 4,605 between 2016 and 2019, and average revenue per store also declined from $2.8 million to $2.5 million.

#3. Pharmaceutical Wholesale Business To Grow 4% Over The Next 3 Years

• Walgreens’ Pharmaceuticals Wholesale segment revenues grew from $22.6 billion in 2016 to $23.1 billion in 2019, and it is estimated to be north of $24.0 billion in 2022, led by growth in specialty pharmaceutical products.

In addition, you can look at how Walgreens spends its money in our interactive dashboard analysis on Walgreens Expenses.

What Happened In The Latest Earnings?

• Walgreens announced its Q2 2020 (ended February 2020) results on April 2, 2020, followed by a conference call with analysts. The company reported revenues of $35.8 billion, reflecting 3.7% y-o-y growth, and better than the company’s provided guidance. EPS came in at $1.52 on an adjusted basis, reflecting a decline of 7.3%.
• The company continued to face pressure in its UK business, due to stiff competition from online retailers. The company in its earnings conference call also stated that after a surge in demand earlier in March, the footfall has declined significantly both in the U.S. and outside of the U.S.

Impact of Coronavirus On Walgreens Boots Alliance

• The current coronavirus crisis will likely impact retail pharmacists due to supply chain disruptions. On the positive side, the retail pharmacy stores are open across the globe, while most of the other stores aren’t in the lockdown, given that access to medication is an essential. Also, many people have stocked up essential OTC and consumer healthcare products, given the lockdown being imposed.
• Beyond medicines, stores such as Walgreens also sell many of the daily use staples, which will likely aid its retail sales. Moreover, the company recently announced it will provide COVID-19 test spaces at some of its stores.
• Walgreens stock price declined 17% since early February (through April 21), after the WHO declared a global health emergency. The broader S&P 500 index also fell by around 15% over the same period.
• For now, the sales are expected to decline in the near term, amid self isolation and lockdown in some countries, which will result in lower footfall across the stores.
• Based on historical trends, Walgreens stock could potentially outperform the broader markets, something we discuss in our analysis on comparison of 2007-08 crisis with 2020 crisis for Walgreens.

In addition, our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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