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The battle for the business of America’s pharmaceutical customers is getting interesting. In recent years all of the nation’s biggest drugstore chains have undertaken sweeping changes.
CVS Health (NYSE: CVS) has not only dropped tobacco products from its retail shelves, it’s also focused more and more on the pharmacy services part of the business that provides benefit management services to 2,000 health plans.
Rite Aid (NYSE: RAD), in addition to actively remodeling many of its 4,600 U.S. stores, has recently completed its acquisition of the pharmacy benefit management company, EnvisionRx, which will increase its exposure in the specialty and mail order pharmacy segment.
And Walgreens today bears the official name Walgreens Boots Alliance (NASDAQ: WBA), reflecting its recent acquisition of the Boots chain that operates drugstores in the U.K. and Ireland. Wal-Mart Stores (NYSE: WMT), meanwhile, operates a thriving pharmacy business that poses formidable competition to the CVS, Rite Aid and Walgreens businesses.
For years, drugs have been regarded as a strong sector, but all of these mergers and restructurings in recent years reflect some anxiety about future growth and the ability to stand out from the competition. There’s an increased focus on health and wellness beyond prescription medication, and on an improved customer experience. At the same time, Rite Aid and CVS are significantly diversified beyond the drugstore business with which their names are so commonly associated.
Investors are watching closely. Last week Rite Aid reported a second quarter that showed total revenues increasing 17.5% but pharmacy sales growing by a much smaller 1.9%. The company also lowered its full-year outlook, citing weak sales trends. Since then, Rite Aid shares have tumbled more than 10%.
Growth and Uncertainty
If you look at the stock price history of these companies, you’ll see a pattern: Several years of strong growth followed by a period of uncertainty. Rite Aid’s shares gained more than 600% over the past five years, but are down about 9% year to date. CVS shares more than tripled over the past five years but are up just 3% year to date.
Finally, there is Walgreens, which has grown at a more modest pace since 2010, but has been far and away the strongest player in recent months. Year-to-date, Walgreens stock is up more than 12%. Walgreens has consistently beat expectations and in its most recent quarter, its revenues increased almost 50%.
All these numbers suggest pretty clearly that the momentum right now is with Walgreens. These three chains are not direct competitors in every market in the U.S.: There are many places where consumers have limited choice and shop at the place that’s most convenient, with little regard to brands.
Nonetheless, Walgreens is clearly doing something right. Its stores are functional, yet uncluttered and seem to have struck the right mix of pharmacy products and other merchandise. Investors looking for a promising drug store stock should take a closer look at Walgreens stock.