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The three-year-long historic public health crisis significantly altered the structure and trend of the Retail - Pharmacies and Drug Stores industry. On a positive note, amid acute supply-chain disruption and staffing shortages within healthcare, the retail pharmacy business witnessed high demand, thanks to the exponentially growing demand for distant medical services and remote patient care.
Particularly, mail-order pharmacies registered growth by adopting digital health services in the form of telehealth and remote monitoring. With digitization, retail industry players are also significantly strengthening their omnichannel presence from sole brick-and-mortar dependency. All these are creating unique opportunities for industry stalwarts like CVS Health, Herbalife and Rite Aid, 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 the end of the pandemic, 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 least, perceiving the huge growth prospects of this space, there have been a number of new entries, which have increased the competitiveness of the space. Especially, a stalwart like Amazon's 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 potential 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
Massive Digital Adoption: Thanks to the pandemic, there has been a significant shift in demand toward mail order and online pharmacies. Even in the current post-pandemic phase, pharmacy retailers experience growing consumer preference for these alternative channels compared to brick-and-mortar pharmacies. Going by a Patch report during the pandemic, "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."
A 2023 pharmacy study by J.D. Power (as published in Progressive Grosser) noted that while in 2022, there was 76% customer reliance on digital platforms, the same shot up to 81% in 2023. The top digital channels cited by mail-order customers were pharmacy websites (59%), mobile apps (34%), and text messages (29%). Accordingly, the companies are strategically attempting to grow digitally.
A Difficult Pharmacy Reimbursement Scenario: 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 ongoing economic slump. Drug retailers are also witnessing a constant rise in medicine prices, stemming from the rising cost of raw materials.
The industry players are currently grappling with continued pressure from non-reimbursable pharmacy expenses, which are significantly pulling down 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. Meanwhile, to improve operating margins, pharmacy retailers have announced plans to reduce their footprint. In this line, in December 2023, CVS Health stated that it would change the way of pricing its prescription drugs with new pharmacy reimbursement.
Amazon's Entry Steals Market Share: Amazon Pharmacy's omnichannel performance has been significantly robust since its inception. Going by a Viseven report dated Jan 5, 2023, Amazon's omnichannel experiences are the keystone to customer retention, helping it to cover previous sales reductions. This has significantly increased competition in the retail pharmacy market.
In October 2023, Amazon Pharmacy announced the launch of a drone delivery service. In 2021, a Business Insider report had come up with the speculation that there were discussions about Amazon setting up standalone stores in a few locations, including Boston and Phoenix. Per the report, which cited insider sources, Amazon was exploring plans to place the pharmacies inside Amazon-owned Whole Foods locations.
Following its entry into the healthcare market, the e-commerce giant has grabbed a significant chunk of the online pharmacy market. With several other initiatives in the works, needless to say, Amazon's entry as a major pharmacy services player is a major blow to the industry, putting retail pharmacy and drugstore stocks in a tighter spot.
Zacks Industry Rank Indicates Dull Near-Term Prospects
The industry's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull 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 #194, placing it in the bottom 23% 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 16.7% over this period against the Retail-Wholesale Sector's rise of 20.1%. The S&P 500 composite has risen 21.6% over the said time frame.
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 8.67X compared with the S&P 500's 20.34X and the sector's 22.70X.
Over the last five years, the sector has traded as high as 11.86X, as low as 7.10X, and at the median of 9.21X.
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. According to the company, CVS.com is one of the top health websites, with more than 2 billion visits in 2022, up nearly 55% over the prior year. CVS Health's digital capabilities for health interactions, such as COVID testing and vaccines, prescription services and sales of health and wellness products, have dramatically increased consumer engagement across all CVS Health businesses.
The Zacks Consensus Estimate for 2023 revenues indicates a 9.9% rise from 2022. CVS Health, a Zacks Rank #3 (Hold) stock, also has an impressive long-term historical earnings growth rate of 6.7%.
Herbalife, as a premier health and wellness company and community, offers science-backed products to consumers in more than 90 markets through entrepreneurial distributors. The company provides health and wellness products in North America, Mexico, South and Central America, Europe, the Middle East, Africa, China and the rest of Asia Pacific. Herbalife provides products in the areas of weight management, targeted nutrition, energy, sports, and fitness, outer nutrition, and literature and promotion items.
The Zacks Consensus Estimate for 2024 revenues indicates a rise of 61% from the 2023 estimated figure. The long-term historical earnings growth rate is pegged at 5.7%. Herbalife carries a Zacks Rank #3 at present.
Rite Aid is benefiting from the expansion of delivery services to its customers. Elixir, Rite Aid's pharmacy benefits and services company, consists of accredited mail and specialty pharmacies, prescription discount programs and an industry-leading adjudication platform to offer superior member experience and cost savings.
Elixir, Rite Aid's pharmacy benefits and services company, consists of accredited mail and specialty pharmacies, prescription discount programs and an industry leading adjudication platform to offer superior member experience and cost savings. Its wholly owned subsidiary Health Dialog provides healthcare coaching and disease management services via live online and phone health services.
The Zacks Consensus Estimate for fiscal 2025 earnings indicates a rise of 15.01% from the fiscal 2024 estimated figure. Rite Aid currently carries a Zacks Rank of #3.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights CVS Health, Herbalife, Rite Aid and Amazon
For Immediate Release
Chicago, IL – January 8, 2024 – Today, Zacks Equity Research discusses like CVS Health (CVS - Free Report) , Herbalife (HLF - Free Report) , Rite Aid (RADCQ - Free Report) and Amazon's (AMZN - Free Report) .
Industry: Drug Stores
Link: https://www.zacks.com/commentary/2206233/3-retail-pharmacy-drugstore-stocks-to-watch-amid-industry-headwinds
The three-year-long historic public health crisis significantly altered the structure and trend of the Retail - Pharmacies and Drug Stores industry. On a positive note, amid acute supply-chain disruption and staffing shortages within healthcare, the retail pharmacy business witnessed high demand, thanks to the exponentially growing demand for distant medical services and remote patient care.
Particularly, mail-order pharmacies registered growth by adopting digital health services in the form of telehealth and remote monitoring. With digitization, retail industry players are also significantly strengthening their omnichannel presence from sole brick-and-mortar dependency. All these are creating unique opportunities for industry stalwarts like CVS Health, Herbalife and Rite Aid, 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 the end of the pandemic, 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 least, perceiving the huge growth prospects of this space, there have been a number of new entries, which have increased the competitiveness of the space. Especially, a stalwart like Amazon's 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 potential 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
Massive Digital Adoption: Thanks to the pandemic, there has been a significant shift in demand toward mail order and online pharmacies. Even in the current post-pandemic phase, pharmacy retailers experience growing consumer preference for these alternative channels compared to brick-and-mortar pharmacies. Going by a Patch report during the pandemic, "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."
A 2023 pharmacy study by J.D. Power (as published in Progressive Grosser) noted that while in 2022, there was 76% customer reliance on digital platforms, the same shot up to 81% in 2023. The top digital channels cited by mail-order customers were pharmacy websites (59%), mobile apps (34%), and text messages (29%). Accordingly, the companies are strategically attempting to grow digitally.
A Difficult Pharmacy Reimbursement Scenario: 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 ongoing economic slump. Drug retailers are also witnessing a constant rise in medicine prices, stemming from the rising cost of raw materials.
The industry players are currently grappling with continued pressure from non-reimbursable pharmacy expenses, which are significantly pulling down 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. Meanwhile, to improve operating margins, pharmacy retailers have announced plans to reduce their footprint. In this line, in December 2023, CVS Health stated that it would change the way of pricing its prescription drugs with new pharmacy reimbursement.
Amazon's Entry Steals Market Share: Amazon Pharmacy's omnichannel performance has been significantly robust since its inception. Going by a Viseven report dated Jan 5, 2023, Amazon's omnichannel experiences are the keystone to customer retention, helping it to cover previous sales reductions. This has significantly increased competition in the retail pharmacy market.
In October 2023, Amazon Pharmacy announced the launch of a drone delivery service. In 2021, a Business Insider report had come up with the speculation that there were discussions about Amazon setting up standalone stores in a few locations, including Boston and Phoenix. Per the report, which cited insider sources, Amazon was exploring plans to place the pharmacies inside Amazon-owned Whole Foods locations.
Following its entry into the healthcare market, the e-commerce giant has grabbed a significant chunk of the online pharmacy market. With several other initiatives in the works, needless to say, Amazon's entry as a major pharmacy services player is a major blow to the industry, putting retail pharmacy and drugstore stocks in a tighter spot.
Zacks Industry Rank Indicates Dull Near-Term Prospects
The industry's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull 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 #194, placing it in the bottom 23% 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 16.7% over this period against the Retail-Wholesale Sector's rise of 20.1%. The S&P 500 composite has risen 21.6% over the said time frame.
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 8.67X compared with the S&P 500's 20.34X and the sector's 22.70X.
Over the last five years, the sector has traded as high as 11.86X, as low as 7.10X, and at the median of 9.21X.
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. According to the company, CVS.com is one of the top health websites, with more than 2 billion visits in 2022, up nearly 55% over the prior year. CVS Health's digital capabilities for health interactions, such as COVID testing and vaccines, prescription services and sales of health and wellness products, have dramatically increased consumer engagement across all CVS Health businesses.
The Zacks Consensus Estimate for 2023 revenues indicates a 9.9% rise from 2022. CVS Health, a Zacks Rank #3 (Hold) stock, also has an impressive long-term historical earnings growth rate of 6.7%.
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Herbalife, as a premier health and wellness company and community, offers science-backed products to consumers in more than 90 markets through entrepreneurial distributors. The company provides health and wellness products in North America, Mexico, South and Central America, Europe, the Middle East, Africa, China and the rest of Asia Pacific. Herbalife provides products in the areas of weight management, targeted nutrition, energy, sports, and fitness, outer nutrition, and literature and promotion items.
The Zacks Consensus Estimate for 2024 revenues indicates a rise of 61% from the 2023 estimated figure. The long-term historical earnings growth rate is pegged at 5.7%. Herbalife carries a Zacks Rank #3 at present.
Rite Aid is benefiting from the expansion of delivery services to its customers. Elixir, Rite Aid's pharmacy benefits and services company, consists of accredited mail and specialty pharmacies, prescription discount programs and an industry-leading adjudication platform to offer superior member experience and cost savings.
Elixir, Rite Aid's pharmacy benefits and services company, consists of accredited mail and specialty pharmacies, prescription discount programs and an industry leading adjudication platform to offer superior member experience and cost savings. Its wholly owned subsidiary Health Dialog provides healthcare coaching and disease management services via live online and phone health services.
The Zacks Consensus Estimate for fiscal 2025 earnings indicates a rise of 15.01% from the fiscal 2024 estimated figure. Rite Aid currently carries a Zacks Rank of #3.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.