Walgreens Boots Alliance has promising plan for future, analyst says
NEW YORK – Despite the recent 3% decline in share prices of Walgreens Boots Alliance following its analyst day – shares opened at $89.23 Friday morning, down $2.74 from Tuesday's close – there is a lot of potential upside for the three-month-old company, William Blair analyst Mark Miller suggested in a research note published Friday. "We maintain our Outperform rating and EPS estimates of $3.70 and $4.35 in fiscal 2015 and 2016, respectively," he said. "Our calendar 2016 projection is $4.50, rising to $6.00-plus in 2018. Given the challenges to find this type of growth among large-cap consumer and healthcare companies, we believe investors could frame a higher-teens multiple over the next 18 to 24 months."
Miller's projected EPS performance for fiscal 2015 exceeds WBA's guidance of between $3.45 and $3.65, but his fiscal 2016 projection falls in the middle of WBA's goal of between $4.25 and $4.60 for that year.
But the fact that WBA appears willing to substantially to evolve its business model and its increased engagement with payers are promising developments following the company's two-day analyst day. "Management said the right things about improving operations, and now the organization needs to execute against those aspirations," Miller wrote. "While some investors were disappointed by the absence of hard financial targets, we believe the team likely will get the benefit of the doubt based on the strong track record of Alliance Boots."
One of the changes WBA plans to implement across its U.S. store base is an improvement in front-end margins, something that is benefited by owned brands like No7 and simpler offers such as "3 for 2" and "5 times points." "Over the intermediate term, we perceive the company should be able to better use data from the Balance Rewards program, as it has effectively done with Boots in the United Kingdom," Miller added.
Better utilizing its Balance Rewards program to enhance personalized offer capabilities and to improve the frequency of transactions among the company's most valuable customers were some key themes emphasized by WBA executives over the course of the analyst meeting. It's especially key, noted Ken Murphy, Walgreens Boots Alliance EVP and president of global brands, because the digital channel has placed tremendous pressure on any pricing model by making prices transparent across channels and, because of the immediacy of delivery expected by digital consumers, it's a more expensive channel to serve.
Murphy identified six trends concerning customers' changing behaviors: authenticity ("If you don't stand for something you quickly become irrelevant."), brand me (personalized service), convenience (today and in the future, convenience will be measured in one hour or less), global village (products are travelling the world faster than ever before), cool austerity ("A Dollar General bag is now a badge of honor … you cannot insult the customer on price.") and always on (retailers need to be connected and online no matter the time of day because consumers take a zero tolerance policy against poor retail experience).
To help differentiate Walgreens, Murphy noted that WBA will be focused on being first to market and featuring product exclusives as long as possible.
Across the back-end, WBA acknowledged several headwinds facing the company, including pressure on pharmacy reimbursement and the growth of restricted networks. "In response, the company has a new mindset toward broadening access, untethered from a historical, singular focus on gross profit per script," Miller said. "While pharmacy margins may trend lower, the company aims to improve integration with marketing and operations to increase conversion once Walgreens is part of a pharmacy plan."
Increasing patient exposure to Walgreens' services was another key theme from WBA executives during the meeting. "The reality is we're no longer No. 1 in pharmacy volume," noted Alex Gourlay EVP Walgreens Boots Alliance and president Walgreens. "Nobody here is OK with that," he added. Gourlay said Walgreens' most important customer today is the baby boomer – they spend four-times more in the pharmacy and represent 64% of front-end sales.
Walgreens Boots Alliance's Jeffrey Berkowitz, EVP and president of pharma and global market access, identified three pressure points impacting profitable access. There is the cost of pharmaceuticals and generic penetration with the slowing down of the generic wave; there is pure reimbursement pressure from governement and a consolidating payer market that is fast becoming "the new normal"; and there is a shift in the pools of access.
To adress these pressure points, WBA will be focusing on increasing access across four segments: Medicare Part D, commercial, Medicaid/cash and health exchanges. "Our payers are already viewing our evolving approach with optimism," Berkowitz said.
"Walgreens is a great company with incredible assets and a solid foundation," Gourlay said. "We're just getting started."