Green shoots for 120 year old US drug retailer?

Scott Williams

Fiftyone Capital

Walgreens Boots Alliance (WBA) has underperformed the S&P500 for 6-years due to an old business model that failed to transform digitally, threat of new entrants and COVID-19 impact. This traditional slow-moving business is entering an exciting transition phase with a new tech savvy CEO, cash proceeds from an asset sale to pay down debt and conduct M&A, and growth opportunity from the vaccine rollout. With investor sentiment and valuation at depressingly low levels, and with only 2 buy recommendations from Wall Street we think now is the time to invest in this Blue-Chip company given the exciting transition under new leadership.


Walgreens Boots Alliance is a global retail pharmacy. It’s US franchises ‘Walgreens’ & ‘Duane Reade’, and the UK/Europe franchise ‘Boots’ consist of almost 19,000 stores. Within its stores the pharmacy arm accounts for around 75% of sales, and the retail arm (healthcare, beauty products, toiletries, and general merchandise) the remainder. The US contributes to 75% of overall sales, while more than 10% comes from Europe (excluding the UK), and almost 10% of revenues from the UK. WBA was formed in 2014 through the merger of Walgreens and Alliance Boots and since then has underperformed the S&P 500 by 126%. Part of the more recent underperformance is the threat of new pharmacy entrants such as pure online models like PillPack (AMZN) & GoodRX (GDRX). Covid-19 and lockdowns further weighed on performance due to minimal foot traffic and a poor cold/flu season. Offsetting weaker retail sales in-store was an improving online omnichannel with US online +78% and International +105% % in Q2 FY21.

Investment Thesis

New CEO Rosalind Gates Brewer taking the helm to guide the company into the digital phase. Ms Brewer was named CEO in March 2021 and has an impressive track record. She led the digital transformation at Starbucks and was CEO of Sams Club where she was instrumental in strategic development, helping accelerate growth and increasing the use of digital technology in the consumer experience. While only in the role 2 weeks, on the Q2 earnings call Ms Brewer said that with 100 million loyalty members and 9000 stores in the US there is great opportunity to build a strong omnichannel. The digital team is already looking at first party customer data and mass personalisation is a growth opportunity. Ms Brewer will also concentrate on automation of the pharmacy and driving maintenance scripts into micro fulfillment centres over time. This will free up the pharmacists to work on higher-value activities within the stores and drive better health care outcomes and increase relevance overall in the market. WBA is transforming into an innovative technology-based consumer-centric health care business. A recent example is their investment in iA which sits in the sweet space of the automation of the pharmacy and driving maintenance scripts (Technical Difficulty) samples over time. Automation will free up a pharmacist to work on higher value activities.

Unlocking Value. WBA is selling its wholesale drug business, Alliance Healthcare, to AmerisourceBergen (ABC) for $6.4bn, of which $6.2b is in cash. AH had been WBA’s most consistent business ($19bn sales, $540m EBITDA) in recent years but received zero attention or credit from investors. Selling for 12x trailing EBITDA is far above what was given by the market and it allows WBA pay down debt and redeploy cash into technological growth areas and improving core pharmacy and healthcare. WBA owns 28% ($6bn) of ABC and the deal will allow WBA to retain wholesale distribution pricing power. WBA has an equity portfolio of at least $10bn: ABC stake $6b, $1B stake in VillageMD, GuoDa ~$1B (WBA invested $416M in 2018 and store base since doubled), Option Care ~$1B, and Brightspring/PharMerica >$500M. Together these investments represent 11% of WBA EV and are higher multiple assets than what WBA receives and the street may be undervaluing these investments. There is potential upside to come from future distributions or taking the private holdings public. WBA is also on track to deliver >$2B annualized savings by FY22.

Back to normal. WBA retail segment was hit hard during COVID lockdowns on lack of foot traffic and the script segment was hit on a weak cold/flu season. With lockdowns easing, and travel increasing we expect retail sales to recover to normal levels. WBA stores across the US are starting to be used as testing and vaccine centres. The COVID-19 vaccine opportunity is expected to be 26mm-34mm doses, up from the original estimate of ~25mm-30mm. Management has included the $40 dose vaccine rate for Medicare (up from $28) in their guidance, but not for commercial doses since the company is still working with payers to receive the higher reimbursement amount. Margins on the administration of the vaccine are expected to be accretive to the overall U.S. margin for FY21. The vaccine opportunity will completely offset the hit to cold/flu and beyond that WBA will see a strong bounce back from negative comps. WBA has made big improvements in its digital platform with US online sales +78% to $370 million, and +105% in the UK with in Q221. This comes as CEO Rosalind Gates Brewer joins the company and has noted the digital opportunity in building out a strong omnichannel. The increase in traffic in stores from vaccines is a prime opportunity to personalise and learn about customers and new customers. Every person that comes through a Walgreens store for a vaccine will be enrolled into their patient systems collecting individual data and adding them to marketing materials and having the ability to communicate directly with customers.  


We use a blended multiple analysis. WBA’s 5 year average EV/EBITDA is 8.7x, which is below the current 9.1x. But we think it deserves a higher multiple. Applying 10x to FY22 EBITDA estimates of $7.24B, a share price of $63 is attainable, or 20% upside from current levels.

Looking at the PE ratio over 5 years, the average is 11.4x vs the current 11.8x. But applying 14.6x which is one standard deviation above the average on FY22 EPS estimates of $5.421, WBA is valued at $80 or 50% higher. Blending the two together with a 75/25 weighting, we think $67.25 is a fair price for WBA within the next 12 months, or 23% upside.

Relative to the S&P500, WBA NTM EV/EBITDA and NTM PE are trading at a 50% & 58% discount to the S&P500 vs a long-term average discount of 8.7% & 5%, respectively.

WBA is modestly levered at ~2x Net debt/EBITDA, and $2.5billion from the sale of AH will be used to paydown debt.


Exclusion of pharmacy benefit manager (PBM) provider networks

Increased government regulation

Changes to pricing benchmarks

International: WBA has international exposure, centered in the UK.


WBA is on the verge of breaking out of a 12-month rounding base which followed a 6 year downtrend. It's in the early stages of forming an uptrend with a series of higher-highs and lower-lows. A break above $55 will open up the door to $65. A violation of the early uptrend will cause us to review the technical setup, and a break of the 200day would be a stop loss.  

Scott Williams
Portfolio Manager
Fiftyone Capital

Scott is the Executive Chairman at Fiftyone Capital. As the previous CEO, Scott founded the company to manage not only his own wealth, but the wealth of other investors and families looking for a safe harbour for their capital.

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