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2 Retail Pharmacy Stocks to Watch and One to Avoid Amid Industry Headwinds
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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 (CVS - Free Report) and Walgreens Boots Alliance (WBA - Free Report) , which are investing strategically in easy patient access to prescription and maintenance medications.
However, the majority of the retail pharmacy and 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.
Herbalife Ltd (HLF - Free Report) is one such stock whose performance is negatively impacted by these industry-wide trends. Last but not least, perceiving the huge growth prospects of this space, there have been a number of new entries that have increased the competitiveness in the space. In particular, a stalwart like Amazon’s (AMZN - Free Report) 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
A Difficult Pharmacy Reimbursement Scenario: Brand-name drugs that 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 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. Amazon Pharmacy is currently using generative artificial intelligence to fill prescriptions more quickly and accurately, accelerate customer service and ensure the right quantities of medications in stock.
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 progress, needless to say, Amazon’s emergence as a major pharmacy services player is a significant blow to the industry, putting retail pharmacy and drugstore stocks in a tighter spot.
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. The digital pharmacy market is rapidly gaining popularity in recent times in the form of improving access to physicians, diagnosis and treatments.
According to an Insight Partners report, the digital pharmacy market size was valued at $96.4 billion in 2022. It is projected to reach a global market size of $363.9 billion by 2030. A 2023 pharmacy study by J.D. Power (as published in Progressive Grosser) noted that while customer reliance on digital platforms was 76% in 2022, 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%). The companies are strategically attempting to grow digitally.
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 #234, placing it in the bottom 7% 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. However, 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 8% over this period against the Retail-Wholesale sector’s growth of 29.7%. The S&P 500 Composite has risen 28.4% over the said time frame.
One-Year 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 8.50X compared with the S&P 500’s 21.38X and the sector’s 22.86X.
Over the last five years, the sector has traded as high as 11.88X, as low as 7.18X, and at the median of 8.98X, as the charts below show.
Price-to-Earnings Forward Twelve Months (F12M)
Price-to-Earnings Forward Twelve Months (F12M)
2 Retail - Pharmacies and Drug Stores Stocks in Focus and 1 to Avoid
CVS Health is committed to increasing investments in fast-growing spaces like enterprise data platforms, cloud capabilities and digital products to offer innovative solutions through mobile and web channels. The company is investing in emerging technology capabilities such as voice, artificial intelligence and robotics to automate, reduce cost and improve the experience for its constituents. CVS Health’s solid digital engagement and enhanced capabilities should strengthen its ability to drive seasonal flu and RFD immunization awareness and connect patients to the CVS locations for these important health services.
The Zacks Consensus Estimate for 2024 revenues indicates a 3.6% rise from the 2023 level. CVS Health, which presently holds a Zacks Rank #3 (Hold), has an impressive long-term earnings growth rate of 9.1%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: CVS
Walgreens Boots continued to transform the method of delivering healthcare through physical stores and digital channels. The company’s network of micro fulfillment centers is helping to stabilize staffing and pharmacy hours, reduce work full pain points and free up capacity to drive the outcomes that matter most to its patients and partners. WBA is also piloting a virtual pharmacy to redefine connected care, increase patient access, enhance workplace flexibility and extend its pharmacist reach. At present, Walgreens Boots 11 micro-fulfilment centers currently support 4,600 stores.
The Zacks Consensus Estimate for fiscal 2024 revenues indicates growth of 4.4% from the 2023 reported figure. The company’s long-term earnings growth rate is 5%. Walgreens Boots carries a Zacks Rank #3 at present.
Price and Consensus: WBA
Herbalife, as a premier health and wellness company and community, offers science-backed products to consumers in more than 90 markets through entrepreneurial distributors. It provides products in the areas of weight management, targeted nutrition, energy, sports, and fitness, outer nutrition, and literature and promotion items. The company is currently experiencing a decline in sales. Herbalife's direct-selling business model and product range, which includes weight management and nutrition products, are facing challenges amid a complex economic environment.
The Zacks Consensus Estimate for 2024 revenues indicates a plunge of 18.5% from the 2023 reported figure. The company’s long-term earnings growth rate is -4%. Herbalife carries a Zacks Rank #5 (Strong Sell) at present.
Price and Consensus: HLF
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2 Retail Pharmacy Stocks to Watch and One to Avoid 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 (CVS - Free Report) and Walgreens Boots Alliance (WBA - Free Report) , which are investing strategically in easy patient access to prescription and maintenance medications.
However, the majority of the retail pharmacy and 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.
Herbalife Ltd (HLF - Free Report) is one such stock whose performance is negatively impacted by these industry-wide trends. Last but not least, perceiving the huge growth prospects of this space, there have been a number of new entries that have increased the competitiveness in the space. In particular, a stalwart like Amazon’s (AMZN - Free Report) 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
A Difficult Pharmacy Reimbursement Scenario: Brand-name drugs that 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 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. Amazon Pharmacy is currently using generative artificial intelligence to fill prescriptions more quickly and accurately, accelerate customer service and ensure the right quantities of medications in stock.
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 progress, needless to say, Amazon’s emergence as a major pharmacy services player is a significant blow to the industry, putting retail pharmacy and drugstore stocks in a tighter spot.
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. The digital pharmacy market is rapidly gaining popularity in recent times in the form of improving access to physicians, diagnosis and treatments.
According to an Insight Partners report, the digital pharmacy market size was valued at $96.4 billion in 2022. It is projected to reach a global market size of $363.9 billion by 2030. A 2023 pharmacy study by J.D. Power (as published in Progressive Grosser) noted that while customer reliance on digital platforms was 76% in 2022, 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%). The companies are strategically attempting to grow digitally.
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 #234, placing it in the bottom 7% 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. However, 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 8% over this period against the Retail-Wholesale sector’s growth of 29.7%. The S&P 500 Composite has risen 28.4% over the said time frame.
One-Year 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 8.50X compared with the S&P 500’s 21.38X and the sector’s 22.86X.
Over the last five years, the sector has traded as high as 11.88X, as low as 7.18X, and at the median of 8.98X, as the charts below show.
Price-to-Earnings Forward Twelve Months (F12M)
Price-to-Earnings Forward Twelve Months (F12M)
2 Retail - Pharmacies and Drug Stores Stocks in Focus and 1 to Avoid
CVS Health is committed to increasing investments in fast-growing spaces like enterprise data platforms, cloud capabilities and digital products to offer innovative solutions through mobile and web channels. The company is investing in emerging technology capabilities such as voice, artificial intelligence and robotics to automate, reduce cost and improve the experience for its constituents. CVS Health’s solid digital engagement and enhanced capabilities should strengthen its ability to drive seasonal flu and RFD immunization awareness and connect patients to the CVS locations for these important health services.
The Zacks Consensus Estimate for 2024 revenues indicates a 3.6% rise from the 2023 level. CVS Health, which presently holds a Zacks Rank #3 (Hold), has an impressive long-term earnings growth rate of 9.1%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: CVS
Walgreens Boots continued to transform the method of delivering healthcare through physical stores and digital channels. The company’s network of micro fulfillment centers is helping to stabilize staffing and pharmacy hours, reduce work full pain points and free up capacity to drive the outcomes that matter most to its patients and partners. WBA is also piloting a virtual pharmacy to redefine connected care, increase patient access, enhance workplace flexibility and extend its pharmacist reach. At present, Walgreens Boots 11 micro-fulfilment centers currently support 4,600 stores.
The Zacks Consensus Estimate for fiscal 2024 revenues indicates growth of 4.4% from the 2023 reported figure. The company’s long-term earnings growth rate is 5%. Walgreens Boots carries a Zacks Rank #3 at present.
Price and Consensus: WBA
Herbalife, as a premier health and wellness company and community, offers science-backed products to consumers in more than 90 markets through entrepreneurial distributors. It provides products in the areas of weight management, targeted nutrition, energy, sports, and fitness, outer nutrition, and literature and promotion items. The company is currently experiencing a decline in sales. Herbalife's direct-selling business model and product range, which includes weight management and nutrition products, are facing challenges amid a complex economic environment.
The Zacks Consensus Estimate for 2024 revenues indicates a plunge of 18.5% from the 2023 reported figure. The company’s long-term earnings growth rate is -4%. Herbalife carries a Zacks Rank #5 (Strong Sell) at present.
Price and Consensus: HLF