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3 Stocks to Avoid From The Volatile Retail Pharmacy Industry
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The majority of the Retail - Pharmacies and Drug Stores heavyweights have been southbound due to the ongoing pressure of rising expenses and labor shortages. Consumers have limited money to spend, which is leading to a decline in retail pharmacy products. Added to this, the entire retail pharmacy industry is 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. Unfavorable drug pricing and reimbursement are acting as a huge burden on this sector, putting substantial pressure on the companies.
CVS Health (CVS - Free Report) , Walgreens Boots Alliance (WBA - Free Report) and Herbalife Ltd (HLF - Free Report) are three stocks that have been negatively impacted by the industry-wide trends. Also, Amazon’s (AMZN - Free Report) dominance in the retail drugstore space has created a survival issue for the existing entities.
On a positive note, 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 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.
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
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. Going by a National Association of Chain Drugs report, payors are substantially shrinking reimbursement, many times below the cost of buying and dispensing prescription drugs. This is putting substantial and unsustainable financial pressure on the companies to the extent that many of the industry players over the past year were seen shutting down their businesses, reducing the number of stores or going private.
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 June 2024, the company announced that Prime’s RxPass subscription savings program is gaining popularity by providing an exclusive benefit to Prime members that enables affordable access to common medications. In 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.
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 $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.
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 bleak 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 #249, placing it in the bottom 1% 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.
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 22.7% over this period against the Retail-Wholesale sector’s growth of 18.6%. The S&P 500 composite has risen 22.6% 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 7.45X compared with the S&P 500’s 21.17X and the sector’s 22.38X.
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)
3 Retail - Pharmacies and Drug Stores Stocks to Avoid
CVS Health, within the Health Care Benefits segment, has been grappling with a sudden increase in Medicare Advantage members’ utilization trend, where an increasing number of members are opting for health benefits. This significantly impacted the company’s second-quarter 2024 performance. CVS Health is particularly facing outpatient and supplemental benefits pressure. Added to this, the company is also witnessing pressure from inpatient categories, RSV vaccines and other pharmacy benefits. This has resulted in a significant rise in the company’s medical costs, putting pressure on margins. The downward revision in the 2024 earnings outlook looks worrisome.
The Zacks Consensus Estimate for 2024 earnings indicates a 25.4% plunge from the 2023 level. CVS Health, which presently holds a Zacks Rank #4 (Sell), delivered a trailing four-quarter average negative earnings surprise of 2.02%.
Price and Consensus: CVS
Herbalife, as a premier health and wellness company and community, offers science-backed products to consumers in more than 90 markets through entrepreneurial distributors. Like the company’s industry peers, Herbalife too is grappling with issues of U.S. retail pharmacy. Increased reimbursement pressure and drug cost inflation have been denting the company’s margins.
The Zacks Consensus Estimate for 2024 revenues indicates a 1.8% dip from the 2023 reported figure. The 2024 earnings estimate projects a 59.3% decline from the year-ago period. Herbalife carries a Zacks Rank #4 at present.
Price and Consensus: HLF
Over the past few quarters, Walgreens Boots has faced significant challenges within the company’s U.S. Retail Pharmacy business stemming from an unfavorable consumer environment and challenging pharmacy industry trends. The company, in this regard, noted that customers have become increasingly selective and price-sensitive in their purchases. Despite several planned measures being taken, the company does not expect an immediate improvement within the U.S. retail business as the operating environment might continue to remain challenging.
The Zacks Consensus Estimate for fiscal 2024 and fiscal 2025 earnings indicate a decline of 27.9% and 29.8% decline from the respective year-ago figures. Walgreens Boots presently has a Zacks Rank #5 (Strong Sell).
Image: Bigstock
3 Stocks to Avoid From The Volatile Retail Pharmacy Industry
The majority of the Retail - Pharmacies and Drug Stores heavyweights have been southbound due to the ongoing pressure of rising expenses and labor shortages. Consumers have limited money to spend, which is leading to a decline in retail pharmacy products. Added to this, the entire retail pharmacy industry is 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. Unfavorable drug pricing and reimbursement are acting as a huge burden on this sector, putting substantial pressure on the companies.
CVS Health (CVS - Free Report) , Walgreens Boots Alliance (WBA - Free Report) and Herbalife Ltd (HLF - Free Report) are three stocks that have been negatively impacted by the industry-wide trends. Also, Amazon’s (AMZN - Free Report) dominance in the retail drugstore space has created a survival issue for the existing entities.
On a positive note, 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 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.
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
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. Going by a National Association of Chain Drugs report, payors are substantially shrinking reimbursement, many times below the cost of buying and dispensing prescription drugs. This is putting substantial and unsustainable financial pressure on the companies to the extent that many of the industry players over the past year were seen shutting down their businesses, reducing the number of stores or going private.
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 June 2024, the company announced that Prime’s RxPass subscription savings program is gaining popularity by providing an exclusive benefit to Prime members that enables affordable access to common medications. In 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.
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 $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.
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 bleak 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 #249, placing it in the bottom 1% 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.
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 22.7% over this period against the Retail-Wholesale sector’s growth of 18.6%. The S&P 500 composite has risen 22.6% 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 7.45X compared with the S&P 500’s 21.17X and the sector’s 22.38X.
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)
3 Retail - Pharmacies and Drug Stores Stocks to Avoid
CVS Health, within the Health Care Benefits segment, has been grappling with a sudden increase in Medicare Advantage members’ utilization trend, where an increasing number of members are opting for health benefits. This significantly impacted the company’s second-quarter 2024 performance. CVS Health is particularly facing outpatient and supplemental benefits pressure. Added to this, the company is also witnessing pressure from inpatient categories, RSV vaccines and other pharmacy benefits. This has resulted in a significant rise in the company’s medical costs, putting pressure on margins. The downward revision in the 2024 earnings outlook looks worrisome.
The Zacks Consensus Estimate for 2024 earnings indicates a 25.4% plunge from the 2023 level. CVS Health, which presently holds a Zacks Rank #4 (Sell), delivered a trailing four-quarter average negative earnings surprise of 2.02%.
Price and Consensus: CVS
Herbalife, as a premier health and wellness company and community, offers science-backed products to consumers in more than 90 markets through entrepreneurial distributors. Like the company’s industry peers, Herbalife too is grappling with issues of U.S. retail pharmacy. Increased reimbursement pressure and drug cost inflation have been denting the company’s margins.
The Zacks Consensus Estimate for 2024 revenues indicates a 1.8% dip from the 2023 reported figure. The 2024 earnings estimate projects a 59.3% decline from the year-ago period. Herbalife carries a Zacks Rank #4 at present.
Price and Consensus: HLF
Over the past few quarters, Walgreens Boots has faced significant challenges within the company’s U.S. Retail Pharmacy business stemming from an unfavorable consumer environment and challenging pharmacy industry trends. The company, in this regard, noted that customers have become increasingly selective and price-sensitive in their purchases. Despite several planned measures being taken, the company does not expect an immediate improvement within the U.S. retail business as the operating environment might continue to remain challenging.
The Zacks Consensus Estimate for fiscal 2024 and fiscal 2025 earnings indicate a decline of 27.9% and 29.8% decline from the respective year-ago figures. Walgreens Boots presently has a Zacks Rank #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: WBA