Through 2020, the brick-and-mortar pharmacy retailers gained enormous prominence as a result of panic buying of all kinds of immunity-boosting drugs. With their vast pharmacy networks these drug retailers also served as COVID-19 testing centers. Since the end of 2020, these networks have been collaborating with the government and playing a pivotal role in launching vaccination drives across the nation. Further, mail order pharmacies are registering growth on account of telehealth and remote monitoring services. This has created unique opportunities for heavyweights within the industry like
CVS Health ( CVS Quick Quote CVS - Free Report) , Walgreen Boots ( WBA Quick Quote WBA - Free Report) , and Herbalife LTD ( HLF Quick Quote HLF - Free Report) , which invested strategically in easy patient access to prescription and maintenance medications during this period. In spite of that, the retail drug store heavyweights’ stocks have been southbound since the news of Amazon ( AMZN Quick Quote AMZN - Free Report) exploring options to enter into the brick-and-mortar pharmacy space surfaced. Added to this, small and medium pharma retailers are finding it hard to invest in online pharmacies. Industry Description
Retail - Pharmacies and Drug Stores industry essentially includes retailing of a range of prescription and over-the-counter medications. The broad retail network of companies within retail pharmacy industry delivers advanced health solutions to patients, customers and caregivers. Over the past few years, the scope of 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. Going by a small business chronicle report, Walgreens Boots, CVS Health and Rite Aid (RAD) are commonly referred to as the "big three" in the drugstore space. However, non-healthcare leaders like Amazon in 2018, acquired pharmacy delivery startup PillPack to enter the U.S. healthcare space. 4 Trends Shaping the Future of the Retail - Pharmacies and Drug Stores Industry
: 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 suffering from significant rise in medicine prices, stemming from rising cost of raw materials of drugs. In contrast, a number of retail pharmacy players are playing a pivotal role in administering COVID-19 shots. The center has launched Federal-Retail Pharmacy Program for COVID-19 vaccination to increase access to COVID-19 vaccines across the United States. This latest line of opportunity is contributing significantly to these industry players’ top line. Industry Trend Remains Mixed Amid the Pandemic : The widespread shelter-in-place regulations since the beginning of the pandemic have created a significant shift in demand toward mail order and online pharmacy from traditional brick and mortar pharmacies. However, 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. Online Pharmacy and Mail Order Boom 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, retail pharmacy industry entered a new phase of fierce competition. To counter this rivalry, the companies operating in the space are strategically attempting to gain in size and scale, both organically and inorganically. : Threat of Amazon Entering Brick-And-Mortar A Business Insider report on May 26 came up with the speculation that there have been discussions about Amazon setting up stand-alone stores in a few locations, including Boston and Phoenix. Further, per the report, which cites insider sources, Amazon is exploring plans of placing the pharmacies inside Amazon-owned Whole Foods locations. Through 2020, the brick-and-mortar pharmacy retailers gained enormous prominence with their vast pharmacy networks serving as COVID-19 testing centers. The e-commerce giant’s earlier entry into the online pharmacy market has already grabbed a significant chunk of market share from the legacy retail drug store space. Needless to say, this latest speculation has come as a major blow to the industry, putting retail pharmacy and drugstore stocks in a tighter spot.
: In the pre-COVID-19 period too, this industry was entangled in the issue of continuous rise in drug cost. Going by Prescription Drug Inflation Continues a 2020 Fortune report, more than 3,400 prescription drugs’ prices were hiked in the first six months of 2019, reflecting a 17% increase from the year-earlier tally. This, in turn, led patients to replace prescription medicines with low-cost generic drugs. The trend largely hurt the business of the likes of Walgreens Boots and Rite Aid through 2019. Zacks Industry Rank Indicates Dull Near-Term Prospects
Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak 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 #132, placing it in the bottom 48% 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 but Outperforms Sector
The Zacks Retail - Pharmacies and Drug Stores industry has underperformed the Zacks S&P 500 composite but exceeded its own sector over the past three months. The stocks in this industry have collectively gained 3.1% over this period while the Retail-Wholesale Sector has moved up 1.6%. The Zacks S&P 500 composite has increased 6.9% over the said time frame.
Three-Month 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 10.03X compared with the S&P 500’s 22.1X and the sector’s 28.05X.
Over the last five years, the sector has traded as high as 15.29X, as low as 7.42X, and at the median of 10.03X, 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 Likely to Keep Moving Higher
Herbalife: This nutrition products company’s percentage of U.S. business is growing through distributors who operate a Nutrition Club model, which represents the majority of its volume in the country. Amid the pandemic, the company witnessed growth in the average number of unique customers. The Zacks Consensus Estimate for 2021 earnings indicates year-over-year increase of 33.7%. Herbalife, a Zacks Rank #1 (Strong Buy) stock, has risen 16.4% in the past year. The Zacks Consensus Estimate for fiscal 2021 earnings indicates year-over-year increase of 31%. Price and Consensus: HLF
CVS Health: CVS Health saw greater engagement in expanded set of digital health services such as antibody and PCR testing, vaccinations and omni-channel pharmacy through the pandemic months. The company’s first-quarter revenues registered more than 80% increase in visits to its flagship digital properties. The Zacks Consensus Estimate for 2022 earnings indicates year-over-year increase of 7.7%. CVS Health, a Zacks Rank #3 (Hold) stock, has risen 29% in the past year. Price and Consensus: CVS
Walgreens Boots Alliance: The company recently announced that it is set to extend pharmacy hours of operation each Friday in the month of June for walk-in vaccinations. In May, the company began administering Pfizer’s COVID-19 vaccination to adolescents aged 12-15. Despite lower foot traffic in its pharmacies during the COVID months, the company’s response toward combating the pandemic has led to acceleration in its retail pharmacy business growth. The Zacks Consensus Estimate for fiscal 2022 (ending August 2022) earnings indicates year-over-year increase of 9.3%. Walgreens Boots, a Zacks Rank #3 stock, has gained 14.1% in the past year. Price and Consensus: WBA
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