3 Retail Pharmacy and Drugstore Stocks to Watch in a Growing Industry
The past three years of the public health crisis have significantly altered the structure and trend of the Retail - Pharmacies and Drug Stores industry. On a positive note, amid the ongoing supply-chain disruption and staffing shortages within healthcare, the retail pharmacy business has been in high demand, thanks to the exponentially growing demand for distant medical services and remote patient care. Particularly, mail-order pharmacies are registering growth on account of telehealth and remote monitoring services. Added to this, with digitization, retail industry players are significantly strengthening their omnichannel presence from sole brick-and-mortar dependency. All these are creating unique opportunities for stalwarts within the industry like CVS Health CVS, Walgreens Boots Alliance WBA and Rite Aid RAD, which are investing strategically in easy patient access to prescription and maintenance medications.
However, the majority of the retail drug store heavyweights have been southbound due to the ongoing pressure of inflation and labor shortages. Further, unfavorable drug pricing and reimbursement are a burden on this sector. Added to this, with a decline in the severity of COVID-19, the demand for related retail health support has decreased, resulting in a significant drop in pandemic-led revenue generation for the industry players. Last but not the least, perceiving the huge growth prospects of this space, there has been a number of new entries in this industry, increasing the competitiveness of the space. Especially, a stalwart like Amazon’s AMZN entry into the retail drugstore space has created a survival issue among the existing entities.
Industry Description
The Zacks Retail - Pharmacies and Drug Stores industry includes retailing of a range of prescription and over-the-counter medications. The broad retail network of companies within the retail pharmacy industry delivers advanced health solutions to patients, customers and caregivers. Over the past few years, the scope of the retail pharmacy and drugstore market has expanded exponentially. In North America, some of these entities evolved to add wellness products and groceries to their traditional portfolio of prescription and over-the-counter medications. Looking at the attractive growth potentials of this industry, non-healthcare leaders like Amazon, in 2018, acquired pharmacy delivery startup PillPack to enter the U.S. healthcare space.
3 Trends Shaping the Future of the Retail - Pharmacies and Drug Stores Industry
Online Pharmacy and Mail Order Boom: The widespread shelter-in-place regulations since the beginning of the pandemic have created a significant shift in demand toward mail order and online pharmacies. Experts say that this transition is expected to last even after the pandemic is over. Data claims that COVID-19 has only accelerated the already-growing demand for e-pharmacy and mail-ordered home delivery systems. Going by a Patch report, “Two years ago, 11% of U.S. adult pharmacy customers got their prescription from an online pharmacy, based on a survey conducted by market research firm CivicScience, [.] That figure has been steadily rising over the years, according to Statista.com, an online statistics portal.” With Amazon’s big move into the healthcare space, the retail pharmacy industry entered a new phase of fierce competition. To counter this rivalry, the companies are strategically attempting to gain in size and scale.
Industry Trend Remains Dismal Amid Reimbursement Pressure: Brand-name drugs, which hold wide profit margins, are protected with a reliable supply chain. However, low-margin generic drugs, which have a fragile supply chain network, have been bearing the brunt of the pandemic-induced economic slump. Drug retailers are also witnessing a constant rise in medicine prices, stemming from the rising cost of raw materials of drugs. The industry players are currently grappling with continued pressure from non-reimbursable pharmacy expenses, which are significantly pulling down the mass demand for prescription as well as over-the-counter drugs and vaccinations. It has been widely observed that patients are replacing prescription medicines with low-cost generic drugs.
Amazon's Entry Steals Market Share: A Business Insider report in 2021 came up with the speculation that there have been discussions about Amazon setting up standalone stores in a few locations, including Boston and Phoenix. Further, per the report, which cites insider sources, Amazon is exploring plans to place the pharmacies inside Amazon-owned Whole Foods locations. Earlier, following its entry, the e-commerce giant grabbed a significant chunk of the online pharmacy market from the legacy retail drug store space. Amazon Pharmacy’s omichannel performance has been significantly robust since the inception. Going by a Viseven report of Jan 5, 2023, Amazon’s omnichannel experiences are the keystone to customer retention that help to cover previous sales reductions. This has already significantly increased competition in the retail pharmacy market. Needless to say, the speculation of Amazon planning to enter the Brick-And-Mortar space has come as a major blow to the industry, putting retail pharmacy and drugstore stocks in a tighter spot.
Zacks Industry Rank Indicates Bright Near-Term Prospects
The industry’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates encouraging near-term prospects. The Zacks Retail - Pharmacies and Drug Stores industry, housed within the broader Zacks Retail and Wholesale sector, currently carries a Zacks Industry Rank #114, placing it in the top 45% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
We will present a few stocks that have the potential to outperform the market based on a strong earnings outlook. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Underperforms S&P 500 & Sector
The Zacks Retail - Pharmacies and Drug Stores industry has underperformed the Zacks S&P 500 composite as well as its sector over the past year. The stocks in this industry have collectively lost 27.6% over this period compared with the Retail-Wholesale Sector’s decline of 10.7%. The S&P 500 composite has declined 4.3% over the said time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing medical stocks, the industry is currently trading at 8.11X compared with the S&P 500’s 18.54X and the sector’s 22.29X.
Over the last five years, the sector has traded as high as 12.03X, as low as 7.53X, and at the median of 9.78X, as the charts below show.
Price-to-Earnings Forward Twelve Months (F12M)
Price-to-Earnings Forward Twelve Months (F12M)
3 Retail - Pharmacies and Drug Stores Stocks in Focus
CVS Health is currently seeing greater engagement in an expanded set of digital health services such as antibody and PCR testing, vaccinations and omni-channel pharmacy. During the last-reported fourth quarter of 2022, the company’s unique digital customers increased by seven million to over 47 million. Its individualized Health Dashboard reached eight million active users and interacted with nearly five million customers daily across the community footprint. During the third quarter, CVS Health launched a new functionality that gives patients more choices and convenience for filling prescriptions. Patients can expedite urgent prescriptions, have visibility into out-of-pocket costs, and track their order status, all before even coming into the pharmacy. Further, the company is launching various new MinuteClinic virtual care services that will be available 24/7 to support women's health.
The Zacks Consensus Estimate for 2023 revenues indicates a 3.9% rise from 2021. CVS Health, a Zacks Rank #3 (Hold) stock, also has an impressive five-year expected earnings growth rate of 7.3%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: CVS
Walgreens Boots continues to make progress in transforming the pharmacy business and the method of delivering healthcare, both through physical stores and digital channels. Currently, the company’s U.S. retail business is demonstrating good momentum through digital and omnichannel growth from the myWalgreens loyalty program, owned brand innovation and alternative profit streams. In the last-reported second quarter of fiscal 2023, the company progressed with the transformation of the pharmacy business and the method of delivering healthcare through physical stores and digital channels.
The Zacks Consensus Estimate for fiscal 2023 revenues indicates a rise of 2.6% from fiscal 2022. The long-term expected earnings growth rate is pegged at 3%. Walgreens Boots carries a Zacks Rank #3 at present.
Price and Consensus: WBA
Rite Aid is benefiting from the expansion of delivery services to its customers. It has been providing home delivery service to customers with an eligible prescription, with the benefit of zero delivery fees. It is also providing pick-up and drive-through services for prescriptions and over-the-counter products at its stores. It launched the Buy Online Pickup In Store initiative in a bid to offer better drive-through and curbside pickup options. The company remains focused on accelerating the growth of riteaid.com’s e-commerce sales and expanding its buy online, pick up at store offerings. Continued strength in on-demand delivery, third-party marketplaces, and buy online, pick up at store options is a positive.
The Zacks Consensus Estimate for fiscal 2024 earnings indicates a rise of 5.6% from fiscal 2023. Rite Aid currently carries a Zacks Rank of #3.
Price and Consensus: RAD
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CVS Health Corporation (CVS) : Free Stock Analysis Report
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