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2 Stocks to Watch & One to Avoid From the Volatile Retail Pharmacy Industry

In the middle of the ongoing trend of digitalization within the healthcare product supply side, there has been a significant shift toward digital consumption of healthcare products and services as well. Amid acute supply-chain disruption and staffing shortages within healthcare, the Retail - Pharmacies and Drug Stores industry is witnessing exponentially growing demand for distant medical services and remote patient care. Further, mail-order pharmacies are registering 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 Walgreens Boots Alliance WBA and Herbalife Ltd HLF, 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 rising expenses and labor shortages. Further, under the ongoing stringent monetary policy, consumers have limited money to spend, which is leading to a decline in retail pharmacy products. Added to this, unfavorable drug pricing and reimbursement are a burden on this sector. CVS Health CVS is one such stock whose performance is negatively impacted by these industry-wide trends. Last but not the least, perceiving the huge growth prospects of this space, there have been a number of new entries that have increased competition in the space. In particular, a stalwart like Amazon’s AMZN strict domination within the retail drugstore space has created a survival issue for 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 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 now, when the pandemic is over, pharmacy retailers have been witnessing growing consumer preference for these alternative channels compared to brick-and-mortar pharmacies. The digital pharmacy market is rapidly gaining popularity in the form of improving access to physicians, diagnosis and treatments. Further, with the digitalization of drug stores, easy online purchases of medicines have gained popularity.

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.

Amazon Steals Market Share: Amazon Pharmacy’s omnichannel performance has been significantly robust since its inception. Going by a Viseven report of 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 March 2024, Amazon Pharmacy announced same-day delivery of prescription medication in New York City and the greater LA area, with plans to expand the service to more than a dozen U.S. cities by the end of the year. 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.

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.

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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.

Meanwhile, to improve operating margins, pharmacy retailers have announced plans to reduce their footprint. In December 2023, CVS Health stated that it would change the way it prices its prescription drugs with new pharmacy reimbursement.

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 #227, placing it in the bottom 8% of more than 248 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 23% over this period against the Retail-Wholesale sector’s growth of 23.6%. The S&P 500 composite has risen 23.2% 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 7.46X compared with the S&P 500’s 20.90X 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 & 1 to Avoid

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-fulfillment centers support 4,600 stores.

The Zacks Consensus Estimate for fiscal 2024 revenues indicates growth of 4.9% from the 2023 reported figure. The company’s long-term earnings growth rate is 5%. Walgreens Boots carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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 expanding in the United Kingdom and Spain, banking on the rollout of an all-new distributor e-commerce platform built on Herbalife One. The company’s new restructuring plan to streamline organizational structure (with expected annual cost savings of at least $80 million beginning 2025 and approximately $40 million in 2024) buoys optimism.

The Zacks Consensus Estimate for 2025 revenues indicates growth of 3.9% from the 2024 projected figure. The company’s 2025 earnings growth rate is 33.5% from the 2024 projected figure. Herbalife carries a Zacks Rank #3 at present.

Price and Consensus: HLF

 

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. However, recent challenges in Medicare Advantage mar CVS Health’s profitability. The company’s healthcare benefits segment costs soared much faster due to increased Medicare utilization and a decline in the company's Medicare Advantage star ratings. The company’s health services segment faced headwinds in the form of the loss of a large client and continued pharmacy client price improvements. The downward revision in the 2024 outlook looks worrisome.

The Zacks Consensus Estimate for 2024 earnings estimates indicates an 18.4% plunge from the 2023 level. CVS Health, which presently holds a Zacks Rank #5 (Strong Sell), delivered a trailing four-quarter average negative earnings surprise of 2.3%.

Price and Consensus: CVS

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CVS Health Corporation (CVS) : Free Stock Analysis Report

Amazon.com, Inc. (AMZN) : Free Stock Analysis Report

Herbalife Ltd (HLF) : Free Stock Analysis Report

Walgreens Boots Alliance, Inc. (WBA) : Free Stock Analysis Report

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