Taking the long view provides consistent, steady sales results

Drug Store News, March 22, 2004 by Michael Johnsen

And by investing back into its business through new stores, distribution centers and technological advancements like robotics, Walgreens is making a strong play for a bigger share of the U.S. prescription business down the road.

The demand for pharmaceutical services from now through 2010, when Walgreens hopes to have 7,000 stores operational, will continue to outpace supply, analysts say. And any concerns that Walgreens may be overpopulating the pharmacy landscape with its aggressive new-store program may be overstated.

Sales of prescription drugs are expected to grow almost 150 percent, reaching $446 billion in the next decade. "We need only about 20 percent of those new scripts to fuel our planned growth," commented Bernauer.

Still, the business of pharmacy is not without uncertainty.

Competition continues to grow from the mail order quarter, for instance, and that has generated cause for concern. Nonetheless, Walgreens may have helped neutralize the debate somewhat with its 90day prescription initiative, called Advantage 90.

"Given the financial incentives for employers, employees and PBMs and other third parties, we estimate that mail order's share could grow 25 [percent] to 30 percent over the next 10 years," noted Morgan Stanley analyst Mark Wiltamuth. "While Walgreens and other retailers are beginning to offer comparable 90-day prescription service from their stores as an alternative to mail order, this effort is still in its early stages."

With many of the pricing pressures facing prescription medicines, an already slim profit margin could get slimmer. And that makes the front end of the store, which for Walgreens accounts for roughly 38 percent of sales, that much more crucial to the overall equation.

And that, some analysts argue, is what the chain needs to worry about.

Though there are few concerns that pharmacy supply will outstrip pharmaceutical demand, there is a concern that for seasonal and general merchandise products, beauty and over-the-counter SKUs, the retail landscape is grossly overstored.

However, wrote Lisa Cartwright, a former Smith Barney analyst, "Long term, because of [Walgreens'] competitive advantages of better locations, sharper pricing and superior technology, we believe the company should be able to consistently gain market share in pharmacy and front-end categories."

In which case, 10 years from now Bernauer may be saying it again.

Great. Good job. What's next?

Walgreens' scorecard

Year         Sales ([dagger])    Net earnings ([dagger])    Store count

2007 *            $47.5                   $2.0                 5,631
2006 *             44.0                    1.8                 5,287
2005 *             40.4                    1.5                 4,941
2004 *             36.7                    1.3                 4,592
2003               32.5                    1.2                 4,227
2002               28.7                    1.0                 3,883
2001               24.6                    0.9                 3,520
2000               21.2                    0.8                 3,165

Source: Walgreens annual reports and analyst research notes

* Drug Store News projections

([dagger]) Sales and earnings in billions