Analyst on Walgreens' struggles: Same-store sales, gross margin continues to decline

Brian Gil Tanquilut, Jefferies Analyst joins Yahoo Finance Live to weigh in on why Walgreens was the worst performing stock of 2020 and break down what investors can expect from the pharmacy chain in 2021.

Video Transcript

BRIAN CHEUNG: All right, well, if there are winners, that also means that there are losers, and losers there were. This year it was Walgreens Boots Alliance or WBA. That stock is down 32% year to date in a year that was positive for most of the markets year to date.

So in the face of competition from Amazon and their acquisition of PillPack, it seems like they really struggled on the bottom line. So Jefferies Analyst Brian Tanquilut joins us now to break down what happened and what we should expect from Walgreens in the next year.

So, Brian, again, Amazon and COVID this year were big stories, but I guess I'm wondering is this just a continuation of a tough few years? Because I'm looking at their bottom line, their EBITDA. I mean, when you look at the 12 months ended August 31, $7.8 billion in 2018, then $6.8 billion in 2019, $4.6 billion in 2020. What's-- is that just a secular trend for this company?

BRIAN GIL TANQUILUT: Yeah, Brian, thanks for having me today. And yeah, I guess a straight answer to your question is that Walgreens has seen consistent struggles over the last few years. Same-store sales have been declining. Foot traffic into their stores have been on the decline. Gross margin has been compressing. And, you know, when we entered this year, investors were looking for management to lay out a plan or a strategy on what they're going to do to address those issues.

You know, on the one hand, you've got CVS obviously putting a stake in the sand saying we're going to buy an insurance company, and they did. They bought Aetna. And they're outperforming Walgreens, you know, on whatever metric you want to look at.

So as I look at Walgreens, you know, they haven't arrested that issue with compression of revenues and same store. Their UK business continues to struggle, and they continue to close stores in the UK, and now they don't even have a CEO. So there are a lot of question marks on the Walgreens story, and so it's hard to convince investors to step into the name, even though on the surface looks really cheap.

ALEXIS CHRISTOFOROUS: Brian, what are some of the downside risks you see for Walgreens in the new year? I mean, personally I thought with the vaccine rollout and companies like Walgreens and CVS being a place millions of Americans will potentially be going for their vaccine that that really would give these companies overall a boost across the board. What are your thoughts?

BRIAN GIL TANQUILUT: Yeah, thanks for that question, Alexis. So if you think about the vaccine, I think it's an opportunity. I mean, don't get me wrong. It's a pretty good margin business for these guys.

So, you know, they make about $15 of gross margin, give or take, for every shot that they administer this year and into 2021, so that certainly is going to be a tailwind of sorts for them. And, you know, in theory it will drive incremental traffic to the stores.

Now, downside risk-- you know, the front store, the front end of the store continues to lose market share. People are still buying more of their stuff from online retailers.

Walgreens made a big push into beauty, right? And they were hoping that beauty products, even their own brands like the No7 line, they were hoping that that would drive gross margins. But as you know, we've seen, you know, a decline in utilization or demand for beauty products.

And then lastly, I think that the issue with pricing pressure and the Amazon risk, the overhang from that will persist, especially as Amazon makes a bigger push with PillPack this year. So I think that volumes will remain challenged. Margins will remain challenged. And, you know, with a lack of leadership today with no CEO to drive strategic direction, I think it's going to be tough for them to find their footing this year as well-- or 2021 I mean. Sorry.

BRIAN CHEUNG: Brian, I mean, the history of Walgreens Boots Alliance is really a story, I guess, about scale, and it seems like the whole industry has really-- I mean, you look at Rite Aid, for example. There was a lot of kind of grappling with whether or not scale is the true way to approach it. Do you think that the thesis on what Walgreens was pursuing, you know, five or six years ago has really helped them succeed in this environment today?

BRIAN GIL TANQUILUT: So I think there's a couple of things, Bran. I think, number one, we are overstored. We have way too many pharmacies in the US. And, you know, do we really need 10,000 Walgreens locations? And for every Walgreens or CVS, there's another competing pharmacy within a three-mile radius, right? So I think that is a structural challenge.

And then we've seen the strength of, you know, Walmart, Costco, Kroger, Publix. They all have pharmacy offerings, and so they've become really competitive as well. So I think there is that issue to begin with.

And then I think the shift to online has been a concern as well. And then lastly, you know, I think that the competitors-- you know, if you think about what CVS has done, they've transformed their business from being a pure play, you know, retail-pharmacy operation to doing more health care. I mean, they now consider themselves as a health-care company, and so they bought an insurance business. They have the Minute Clinic in there. You know, we're not seeing that kind of move out of Walgreens.

And so I think from a competitive-dynamic perspective, there are a lot of question marks. We still don't know how they're going to remain competitive. And so I think those are the issues that they face. And to your point, this has been a long time coming. You know, scale mattered at one point, but as the pharmacy business has become a commodity, I think that you need to be more strategic than just being big.

ALEXIS CHRISTOFOROUS: All right, Brian Gil Tanquilut at Jefferies, thanks for being with us. Happy holidays.

BRIAN GIL TANQUILUT: Thanks. You too.