Key Walgreens Metrics
- Overall visits down as we lap last year’s vaccination period, but retail transactions up. Like other retailers we’ve highlighted in recent weeks, Walgreens called out a “difficult operating environment that is especially impacting more discretionary retail” as well as inflationary cost pressures and supply chain disruptions. According to management, customers are “making deliberate choices to prioritize overall value and convenience” and despite food and fuel inflationary pressures, “health and wellness remains a priority.” While overall visits per location are down YoY as the company laps the peak of last year’s vaccination period, fiscal 3Q22/calendar 2Q22 visits per location remain almost 5% above pre-pandemic levels. To this end, management noted that transactions for its retail/non-pharmacy business were positive YoY and that U.S. retail comparable sales (which increased +1.4%, or +2.4% excluding tobacco) were buoyed by strength in health & wellness, at-home COVID tests, and cough/cold/flu. Visits per location will likely continue to fall in the next few quarters against more difficult comparisons, but increased consumer focus on health & wellness should keep visitation trends ahead of historical averages.
- “Hyper-localized” footprint insulates Walgreens from elevated gas prices. With some indications that consumers are starting to be more selective when it comes to physical store visits due to elevated gas prices and trade areas starting to shrink among certain discretionary retail categories, Walgreens’ “hyper-local footprint” could work to its advantage. According to the company, 78% of the U.S. population lives within 5 miles of a Walgreens or Duane Reade store, so we don’t expect gas price inflation to impact Walgreens as much as other categories. Coupled with a myWalgreens membership base approaching 100 million customers, visitation frequency should remain on an upward trajectory.
- Walgreens Health building momentum. Walgreens continues to build momentum for its Walgreens Health business. From a CRE perspective, Walgreens partner VillageMD has already opened 120 co-located clinics (and remains on pace to have 200 locations open by the end of 2022 and 1,000 by the end of 2027) and the retailer continues to see encouraging signs from its 56 Health Corners (which the company plans to grow to 1,200 locations by the end of 2027 and offer its health plan subscribers access to pharmacists or registered nurses). As VillageMD continues to grow from its current base of 315 locations across 22 markets serving over 1.6 million patients, it should be a strong contributor to the retailer’s overall health. According to Walgreens CFO James Kehoe, VillageMD locations generate Year 1 revenue of $1M but a contribution margin loss of $200K-$300K (below). However, at scale (typically a seven-year process), VillageMD locations are expected to deliver $14M in revenue per clinic and $2M in contribution margin (profit before corporate expenses), as shown below.