In Focus: Walgreens
King Adolf, one of the earliest people on record to die of overeating. He went out in style though, passing after having eaten a large amount of lobster, caviar, sauerkraut, herring, champagne and 14 servings of semla with warm milk. Officially, his cause of death was digestive problems. King Adolf died in 1771 at 60 years old, because he had no one to save him from himself.
Publicly traded companies are very good at eating themselves to death. The need to get everything they can or every dollar causes them to get to bloated, very ineffective, and then dead, or very sick. We've seen this with Comp USA (remember them), we've seen this with Circuit City, and now we're seeing this with Walgreens (WBA).
In 2010 Walgreens had 7,562 drugstores, in 2018 Walgreens closed the year operating 9,451 drugstores in the U.S., a 25% increase in stores in eight years, which doesn't sound that bad, but it is.
In Central Florida, where two of my closest relatives live six miles apart from each other, there are three Walgreens, two CVS' (CVS), two Walmart Neighborhood Markets (WMT), and four 7-11s. From relative A's house to Relative B's house, it's three lefts and a straight shot, and there are three Walgreens. These relatives don't live in the country, they're in a populated area of a major city in Central Florida.
I've been to all three Walgreens at different times of the day and have never seen a line that would warrant the need for three stores in this one area. No long lines at the pharmacies and no long lines at the registers. Also, CVS and Walmart's Neighborhood Market have pharmacies. In this particular area it feels as if there are more places to get a prescription than there are medical professionals to prescribe something for you.
To beat the issue again, it's Florida! There's lots of space, so all of these Walgreen facilities are large buildings of the same size with tons of inventory. It just seems like overkill to me. In New York for instance where Duane Reade operates out of smaller spaces, it doesn't seem as bad to have several Duane Reades in close proximity to one another. Duane Reade is also a Walgreens Boots company by the way.
So What is Walgreens
Is it a great company dealing with a four year rough patch or is it a company in decline? From 2010 to current day it has been a decent investment, but for any investor who invested in 2015 at $90 per share or higher it's been a disaster of an investment.
The Walgreens stock price sits at $62.14 per share as of this writing, that's a 36% decline from its $97 per share high in 2015, but $62.14 also represents a 68% increase from its 2010 share price, but don't get too excited. In the same span between 2010 and now the S&P 500 has increased by 172%.
In 2015 Walgreens operated 8,173 stores in the United States, which seems to have been the optimal number of stores for Walgreens based on the stock price. While revenue for Walgreens has increased 32% from 2015 to 2018, the 1,278 stores opened in the U.S. since 2015 has cost the stock price $0.02 per store.
Walgreens has made the mistake that failed retailers before it have made, the mistake of expanding everywhere, of wanting to eat too much. The thought of having a shop with your name on it on every corner sounds good in the movies, but it's a bad idea in practice.
I remember watching Comp USA throw stores up everywhere. Their thought was that the high demand for computers that occurred in the late '90s would last forever, it did not. I also saw Circuit City get hit with the bug to have a store at every major shopping area, only to be strapped for cash when the great recession hit. Now Walgreens has a store on each corner and Amazon is getting into the pharmacy business. Eating too much is fun until it isn't.
Enter KKR & Co, a New York based private equity firm who is in talks with Walgreens to take the company private. According to Bloomberg this could be the largest leveraged buyout in history. KKR & Co, can save Walgreens from itself by closing a few stores, pumping the brakes on store expansions in the U.S., pushing for more online sales, and online sales with in-store pick-ups. These moves could help get the company in shape for a return to the public markets at a later date.
The lesson investors can take away from this is to be weary of the company that needs to see its name on every corner of your neighborhood. The company will get to a point where expansion is doing more harm than good for shareholder value.
King Adolf, Comp USA, Circuit City, and Walgreens have shown us that just because you can eat everything in sight or expand as much as you want to doesn't mean you should. It's probably best for your health and the health of your enterprise that you don't eat it all and expand everywhere. Be more like Little Mac, and less like King Hippo.
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