According to the news report by MarketWatch, Walgreens Boots Alliance Inc.’s stocks dropped by 4% on Friday, December 14 to trade at $78.74 per share, after Goldman Sachs downgraded the company’s shares from “neutral” to “sell”.
Goldman Sachs justified its move by citing concerns about the weakening performance of company’s core retail pharmacy business. Walgreens’ sales have been falling and reimbursement rates have been dropping.
Goldman’s analysts, led by Robert Jones, wrote in a research note that due to the challenges in the retail pharmacy space having intensified, Walgreens is being forced to look for other avenues of growth.
Added to this, competition from the massive online retail giant Amazon.com Inc. is expected to come up in the pharmacy segment.
The note also stated that while Walgreens exploring multiple partnerships and joint ventures to help push growth, these deals, even if they do scale up, will not offset the weakness in the company’s core business.
The most ambitious venture that Walgreens is exploring is opening at least 600 LabCorp patient service centers at their stores across the US over the next 4 years. This venture, according to Goldman, could generate between $7 million and $34 million in incremental EBIT (Expenses Before Income Tax).
Goldman’s assessment is based on approximates of rental income and front end purchases from Walgreens’ stores. However, even if this venture grows, it will not show a material upside in the short term.
Overall, Goldman Sachs’ note stated, that their analysts felt that the company’s efforts to transform itself are an indication of the basic challenges that the entire drug retail market. Additionally, the range of pilot initiatives reflect the company’s uncertainty about how much value each individual project may bring.
Goldman also stated that even if these initiatives being taken by the company attracted customers to Walgreens’ stores, they were not sure whether this increased foot traffic would drive up front end growth meaningfully. This is because for the last 3 years in a row, Walgreens’ front end same-store sales have been steadily declining despite the company having above average market utilization growth.
The company’s leverage levels are also at this time “somewhat elevated” relative to its competitors. Despite this, Walgreens’ stocks are trading at a premium to its larger-cap supply chain peers, especially against CVS Pharmacy, which is in the middle of a take-over of the health insurance giant Aetna Inc.
At the end of the day, both Walgreens and CVS are facing issues with declining productivity in relation to their brick and mortar stores, which Goldman feels will be a challenge to solve for both companies. In fact, Goldman feels that it will be more challenging for Walgreens than CVS since the company does not have direct control of the patient to direct site-of-care.
Goldman stated that it would have a more positive outlook about the company if Walgreens’ various projects prove that they are working and boosting front line sales, since this would then generate higher levels of gross profit and also push market analysts behind the company once more.
Goldman Sachs also lowered its price target for the next 12 months on Walgreens’ stocks from $73 per share to $68 per share, which is about a 14% drop from Friday’s closing level in trading.
Walgreens’ shares have grown by 36% since the company reported its earnings for the fiscal third quarter in June this year, despite two straight quarters of poor fundamental performance. In comparison, the S&P 500 has dropped by 3% in the same time period.
For 2018, Walgreens’ stocks have gone up by 9%, while the Dow Jones Industrial Average and the S&P 500 Index have both fallen approximately 2% each.