For years, Walgreens (WBA) was a sound investment with a consistent investment formula. Their motto of "crawl, walk, run" highlighted the steadiness with which they adopted new trends on a profitable and culturally coherent strategy. Yet despite that history and consistently improving metrics, WBA's stock is trading at less than seven years ago. What gives?
Warren Buffett typically breaks down his analyses into unit characteristics, such as the profit per bottle of Coca-Cola. In doing this with WBA, the profitability per store is roughly $350,000 - down slightly from 2019 but up from 2005, when it was $315,000. Despite improving profits per store, the return on capital has declined as stores have gotten more capital intensive (cost of locations and build-out). Intuitively the profits per store don't seem compelling given capital, complexity, retail and legal challenges.
Given the power of the Walgreens brand and the scale of their operations, it is clear that the business model is challenged. The market seems to be marking down those businesses which rely on traditional real estate locations. The most challenged of their customers are home-bound and affected by chronic conditions. Unlike CVS, which is moving to a neighborhood healthcare model, WBA persists in a more capital intensive neighborhood retail model.
As retail and pharmacy moves online, it appears that the market is skeptical of WBA's ability to pivot. For years, WBA has been discussing a movement to digital but has made little progress. Sporting a P/E of less than 8 and a 4.5% dividend yield, WBA bears watching. But in the current environment, the tech-based, asset-light business models seem to be excelling while the "omni-channel" approaches of physical and digital seem to struggle with cognitive, cultural and operational dissonance.
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