Walgreen CompanyWAG

Morningstar Rating

Stock Research and Analysis

by Matthew Coffina

Walgreen's store base offers unmatched convenience, and its brand name is one of the most recognized in the retail pharmacy business. However, despite some revenue and margin tailwinds, we are highly concerned about competitive pressures. We think Walgreen's Read more

Bulls Say

Walgreen has a history of successful expansion, and almost none of its growth has been the result of acquisitions. Management believes it can double its current store base before the U.S. reaches a saturation point for Walgreen's stores.

Health-care spending growth, the aging population, and the generics wave provide secular tailwinds that boost Walgreen's results.

Walgreen's slowing store growth should result in higher margins, as new stores often post losses in their first years, and mature stores have operating margins considerably higher than the overall company.

Walgreen benefits from slow-changing consumer behavior patterns, its established and convenient store base, and its well-recognized brand name.

Walgreen could have a huge new opportunity in work-site and in-store health clinics, which can provide basic care more cheaply than doctor offices and hospitals. Clinics also have the potential to increase store traffic and prescription volumes. Read more

Bears Say

Mail-order pharmacies went from 13% market share in 1997 to 20% in 2007. PBMs will continue to encourage customers to use their mail-order facilities because of their greater efficiency and fulfillment accuracy.

Although the company believes it can double its current store base before the U.S. is saturated with Walgreen's stores, new stores are likely to be less productive and less profitable, as the best opportunities have already been seized.

The 2007 merger of CVS and Caremark poses new risk for Walgreen, as CVS Caremark is attempting to direct its PBM customers to CVS stores. CVS' same-store pharmaceutical sales growth has begun to outpace Walgreen's for the first time in years.

Walgreen has had to match the aggressive pricing of Wal-Mart and other competitors, which reduces the value proposition of generic drugs. Many of Walgreen's competitors view pharmacy as incidental to their core business, which may make them more willing to sacrifice margins.

Walgreen lags CVS in updating its stores to a more attractive and consumer-friendly format. Read more

Strategy

Walgreen's strategy has been to grow organically, securing prime locations and building popular free-standing stores with drive-throughs. Consumers go to Walgreen's stores for their convenience, consistent Read more

Management

Walgreen has experienced significant management upheaval recently, as its focus has shifted away from aggressive expansion and toward cost cutting, renovating existing stores, and expanding health-care service offerings. Former CEO Jeffrey Rein retired Read more

Profile

Walgreen is one of the nation's largest retail pharmacies, with about 7,000 drugstores located throughout the United States. Prescription drugs account for about 65% of Read more

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