Us Drugstore Chains Research Report June 09

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Research report on US drugstore chains: CVS Caremark, Walgreens, RiteAid

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Us Drugstore Chains Research Report June 09

  1. 1. Analysis of US Drug store chains Knowledge Foundry Business Solutions May 2009 Authors: Raj Bhatt (raj@knowledgefoundry.net), Vivek Bothra This document is not intended to provide tax, legal, insurance or investment advice, and nothing in it should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by Knowledge Foundry Business Solutions.
  2. 2. Contents • Comparison of metrics • Company-specific details
  3. 3. Drug retailing is a mature and competitive business Source: NACDS, Credit Suisse
  4. 4. Store chains and mail order have been gaining strength over independent stores in dispensing prescriptions Market Share of Prescription Rx Sales 100% 80% 60% 40% 20% 0% 2001 2002 2003 2004 2005 2006 2007 2008 Chains Independents Food Stores Mass Merchandisers Mail Order Source : NACDS, Credit Suisse
  5. 5. Drugstore chains are perceived to be convenient and trustworthy for dispensing prescriptions
  6. 6. CVS, Rite Aid and Walgreen are the major US chain drug store chains Comparison of the major drugstore chains (2008) Sales ($Mn) Stores* 100000 8000 7483 87472 6,934 80000 6000 59,034 4901 60000 4000 40000 26,289 2000 20000 0 0 Cvs Corp. Rite Aid Walgreen Cvs Corp. Rite Aid Walgreen Employees 250,000 237,000 215,000 200,000 150,000 113,000 100,000 50,000 0 Cvs Corp. Rite Aid Walgreen * Wal-Mart has 4100 pharmacies, Kroger has 1972; Target has 1400; Kmart has 1000; Supervalu has 920 pharmacies whereas Winn-Dixie has 400 Source: Annual Reports, Yahoo Finance, Wikipedia.org
  7. 7. Prescription drugs usually account for more than 65% of drugstore chain sales Rite Aid Sales break up 2008(%) 0.4% 33.1% 66.5% Pharmacy Front end Other Walgreens Sales Break Up 2008 (%) 25% 10% 65% Prescription Drugs Non prescription drugs General Merchandise
  8. 8. CVS is the largest US provider of prescriptions # Rx's dispensed in 2008 (MM) 800 729 700 617 600 500 400 316 300 300 246 200 149 100 0 CVS Walgreens Medco RiteAid Walmart Express/ NextRx
  9. 9. CVS leads in the West and the South-East, Walgreens in strong in the Mid-West and South- East, whereas RiteAid leads in the North-East Regional Market Share % (2008) 35 34 31 30 28 26 25 24 23 21 20 19 % 18 18 15 15 13 10 5 0 NorthEast West Coast SouthEast MidWest CVS RiteAid Walgreens Source: Credit Suisse
  10. 10. While CVS and Rite-Aid have acquired stores, Walgreens has primarily opened new stores Drug Stores Acquired New Store openings 2000 700 1,862 608 1800 600 1600 501 475 1400 500 1200 400 1000 701 300 800 529 188 600 423 200 147 140 400 120 100 40 47 33 200 95 2 0 9 0 0 2006 2007 2008 2006 CVS 2007 Walgreen Rite Aid 2008 CVS Walgreen Rit e Aid Stores Closed Stores Relocated* 250 200 160 183 136 130 200 140 118 120 150 117 100 94 85 94 80 66 65 100 56 60 47 43 50 32 40 20 0 0 2006 2007 2008 2006 2007 2008 CVS Walgreen Rite Aid CVS Rite Aid * Data for Walgreens is not available Sources: 10k filling, annual reports, press releases
  11. 11. Comparing organic growth, Rite-Aid has grown the slowest in the past few years Same-store Prescription sales growth Same-store Front-end sales growth 10% 8% 8% 6% 6% CVS CVS Rite-Aid 4% Rite-Aid 4% Walgreens Walgreens 2% 2% 0% 0% 2006 2007 2008 2006 2007 2008 Years Years Same-store Sales growth 10% 8% 6% CVS Rite-Aid 4% Walgreens 2% 0% 2006 2007 2008 Years Source: Annual reports, Investor Presentations
  12. 12. CVS has the best operating ratios -- but higher assets due to recent acquisitions 20% 15% 10% 10% Operating profit/Assets 0% CVS Rite Aid Walgeen CVS’ high inventory -10% turnover may be due -20% -30% -25% to the Caremark PBM business Rite-Aid has negative operating margins driven by low sales/ sq ft and low Inventory Days of Sales Inventory/ Total Assets Operating Margin % productivity 100 60% 10% 80 6.9% 80 42% 5.8% 66 40% 32% 5% 60 48 40 20% 15% 0% 20 Cvs Corp. Rite Aid Walgreen 0% -5% 0 Cvs Corp. Rite Aid Walgreen CVS Rite Aid Walgeen -10% -8.0% Sales/Sq feet Contribution Margin % Sales/ Employee CVS has lower 30 27 28 500 contribution margin 1000 900 843 843 813 813 400 407 800 21 but higher sales per 600 600 20 300 233 249 sq ft and sales per 400 388 429 10 200 300 employee 200 100 0 0 Cvs Corp. Rite Aid Walgreen 0 CVS Rite Aid Walgeen Cvs Corp. Cvs Corp. Rite Aid Rite Aid Walgreen Walgreen
  13. 13. CVS has had a consistently higher operating margin– Rite-Aid had negative margins in 2008 Operating Margin 10% 5% Percentage Cvs Corp. 0% Rite Aid 2006 2007 2008 Walgreen -5% -10% Years Operating Margin 10% 5% 0% Percentage -5% Q1 Q2 Q3 Q4 Cvs Corp. -10% Rite Aid -15% Walgreen -20% -25% -30% 2008
  14. 14. CVS carries less than 45 days of inventory whereas RAD and WAG carry more than 60 days Inventory (Days of Sales) 100 75 Cvs Corp. CVs turnover may be driven by the PBM 50 Rite Aid business Walgreen 25 0 2006 2007 2008 Years Inventory (Days of Sales) 100 Although CVS has 75 faster inventory turnover, the Cvs Corp. competition is 50 catching up Rite Aid Walgreen 25 0 Q1 Q2 Q3 Q4 2008
  15. 15. CVS has had consistently higher employee productivity than Rite-Aid and Walgreen Sales/Employee 600000 500000 400000 Cvs Corp. Dollars 300000 Rite Aid 200000 Walgreen 100000 0 2006 2007 2008 Years Sales/Employee 120000 100000 80000 Cvs Corp. Dollars 60000 Rite Aid 40000 Walgreen 20000 0 Q1 Q2 Q3 Q4 2008
  16. 16. Rite-Aid has much lower sales per square foot than its rivals Sales/Square foot 900 800 700 600 Cvs Corp. dollars 500 Rite Aid 400 Walgreens 300 200 100 0 These numbers are 2006 2007 2008 for the retail segment years Pls. note that the 2008 CVS number does not include Longs’ Drug store which have a much lower average of $598 per sq. ft
  17. 17. … and smaller, right-staffed stores Avg Store Sq Foot 15000 13866 12500 10472 10000 5000 0 CVS Rite aid Walgreens Em ployee/Store 40 34 29 30 23 20 10 0 CVS Rite aid Walgreens
  18. 18. Company-specific details
  19. 19. CVS Caremark is positioning itself as an integrated healthcare company
  20. 20. CVS covers most states except the North-West CVS was primarily an east coast retailer till 2003 Minute Clinics are staffed by nurse practitioners and currently focus on acute conditions (e.g., Flu)
  21. 21. Its store-brand sales have increased 47% over the past four years
  22. 22. Key strategic initiatives at CVS Caremark • Completed acquisition of Longs Drugs and Rx America – to gain strength on the West Coast • Successfully launched Proactive Pharmacy Care – a Pharmacy Benefits Management program– to compete against traditional PBM programs as well as drug retailers • Proven to improve adherence to prescriptions • Uses plan design based on a ‘Customer Engagement Engine’ that uses customer behavior, evidence-based medicine • already $8.9 BN in sales • More than 8 MM ExtraCare Health cards • 250 Maintenance Choice enterprise customers • Focusing on specialty pharmacy -- 30 conditions including hemophilia, MS, RA • 20 mail order pharmacies and 52 specialty retail pharmacies • generating revenue of $ 10+ BN • Pharmacy service initiative (PSI) and IT initiative (RxConnect ) to improve the prescription filling process • Launched call center to free up pharmacists time – and improve customer service
  23. 23. Walgreens has a rich history of innovation • 1950 – self service stores • 1968 – Child-proof containers • 1981 – Satellite-linked stores • 1991– POS scanners • 1992 – Drive-through pharmacies • 1999- online prescription history • 2002 – multi-language prescription labels • 2005 – online digital photo printing
  24. 24. Walgreens has a wide spread store network
  25. 25. Key strategic initiatives at Walgreens • Slowing store growth • Re-inventing the customer experience • ‘Affordable Essentials’ program • Prescription Savings program has 1.7 MM+ members –offers discounts on more than 5000 generics; and 90-day supplies at a dollar a week • Optimizing assortment at a store level – to sell more front-end items • Optimizing pricing and promotions • Rolling out new ‘Customer-Centric Retailing (CCR)’ format • Enhance shopping experience by improving sightlines, layout and signage • Collaborating with vendors to leverage insights e.g., Baby care layout • Transforming community pharmacy by the POWER program (centralizing data entry, data review and clinical review of prescriptions) • Allows pharmacists to strengthen their role as trusted clinicians • Reduces overall pharmacy costs • Rolled out in all Florida stores and now launching in Arizona
  26. 26. Key strategic initiatives at Walgreens (contd.) • Expanding health & wellness and specialty pharmacy • 273 Take Care clinics and 364 Worksite Health Centers catering to 180+ enterprise clients and millions of consumers • Specialty/ Infusion centers • Rewiring for growth – driving major cost reduction and productivity gain • Strategic sourcing of indirect spend • Reduce corporate overhead and store labor • Balance workload to free up pharmacists’ time
  27. 27. Rite-Aid has a strong presence on the east coast and in select west coast markets Source: Rite Aid presentation
  28. 28. Key strategic initiatives at Rite-Aid • Focused store growth program – Growth focused on key strategic markets – Segmented stores using sales and profitability performance (High EBITDA margin stores; High volume, lower EBITDA margin stores; Good volume; Low volume) – Emphasis on relocations – “Customer World” pharmacy centric store format prototype • Strengthen pharmacy operations – Improve customer service using • ‘Ready when promised’ program • grow ‘Automated Courtesy Refill’ program • Use new ‘Nexgen’ KPIs • Focus on service at under-performing stores – Differentiated loyalty programs – senior “Living More”, Rx Savings Card – Focus on health and wellness programs
  29. 29. Key strategic initiatives at Rite-Aid (contd.) • Improve front-end operations – Continue to grow private brand penetration (currently 13% of front store) – Differentiating with GNC within-a-store – “Living More” senior loyalty program – Maximize prescription switches to OTC – Optimize front-end assortment and use new pricing model and ad zones to drive sales • Continue operational improvements – Improve store productivity through implementation of best practices across stores – Inventory reduction initiatives without sacrificing customer satisfaction – Expenses aligned with sales level with continued focus on SG&A reduction initiatives – Reduction in supply chain costs

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