Us Drugstore Chains_research Report_june 09

Analysis of US Drug store chains Knowledge Foundry Business Solutions May 2009 Authors: Raj Bhatt ([email protected]), Vivek Bothra

This document is not intended to provide tax, legal, insurance or investment advice, and nothing in it should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by Knowledge Foundry Business Solutions.

Contents • Comparison of metrics • Company-specific details

Drug retailing is a mature and competitive business

Source: NACDS, Credit Suisse

Store chains and mail order have been gaining strength over independent stores in dispensing prescriptions Market Share of Prescription Rx Sales 100% 80% 60% 40% 20% 0%

2001 2002 2003 2004 2005 2006 2007 2008 Chains Food Stores Mail Order Source : NACDS, Credit Suisse

Independents Mass Merchandisers

Drugstore chains are perceived to be convenient and trustworthy for dispensing prescriptions

CVS, Rite Aid and Walgreen are the major US chain drug store chains Comparison of the major drugstore chains (2008) Stores*

Sales ($Mn) 100000

8000

87472

80000

7483 6,934

6000

4901

59,034 60000 4000 40000

26,289 2000

20000

0

0 Cvs Corp.

Rite Aid

Walgreen

Cvs Corp.

Rite Aid

Walgreen

Employees 237,000

250,000

215,000

200,000 150,000 113,000 100,000 50,000 0 Cvs Corp.

Rite Aid

Walgreen

* Wal-Mart has 4100 pharmacies, Kroger has 1972; Target has 1400; Kmart has 1000; Supervalu has 920 pharmacies whereas Winn-Dixie has 400 Source: Annual Reports, Yahoo Finance, Wikipedia.org

Prescription drugs usually account for more than 65% of drugstore chain sales Rite Aid Sales break up 2008(%) 0.4% 33.1%

66.5%

Pharmacy

Front end

Other

Walgreens Sales Break Up 2008 (%) 25%

10%

Prescription Drugs

65%

Non prescription drugs

General Merchandise

CVS is the largest US provider of prescriptions

# Rx's dispensed in 2008 (MM) 800

729

700

617

600 500 400

316

300

300

246

200

149

100 0 CVS

Walgreens

Medco

RiteAid

Walmart

Express/ NextRx

CVS leads in the West and the South-East, Walgreens in strong in the Mid-West and SouthEast, whereas RiteAid leads in the North-East Regional Market Share % (2008) 35 30

34

31

28 24

25

%

23

21

20 15

26

19

18

18

15

13

10 5 0

NorthEast

West Coast CVS

Source: Credit Suisse

RiteAid

SouthEast Walgreens

MidWest

While CVS and Rite-Aid have acquired stores, Walgreens has primarily opened new stores Drug Stores Acquired

New Store openings 700

2000

608

1,862

1800

600

1600 1400 1200

400

1000 800

501

475

500

300

701 529

600 400 95

200

140

100

120 2

188

147

200

423

47

40

33

9

0

0

0 2006 CVS

2007 Walgreen

2006

2008

CVS

2007 Walgreen

2008

Rite Aid

Rit e Aid

Stores Closed Stores Relocated*

250

150 100

200

183

200

140 120

117 94

94

85 47

32

50

160

100 80

136

130

118

66

65

60 40

43

56

20 0

0 2006

2007 CVS

Walgreen

2008 Rite Aid

* Data for Walgreens is not available Sources: 10k filling, annual reports, press releases

2006

2007 CVS

Rite Aid

2008

Comparing organic growth, Rite-Aid has grown the slowest in the past few years Same-store Prescription sales growth

Same-store Front-end sales growth

10%

8%

8% 6%

CVS

6%

CVS

Rite-Aid 4%

4%

Rite-Aid

Walgreens

Walgreens 2%

2% 0%

0%

2006

2007

2008

2006

Years

2007 Years

Same-store Sales growth 10% 8% CVS

6%

Rite-Aid 4%

Walgreens

2% 0% 2006

2007 Years

Source: Annual reports, Investor Presentations

2008

2008

CVS has the best operating ratios -- but higher assets due to recent acquisitions 20%

15% 10%

10%

Operating profit/Assets

CVS’ high inventory turnover may be due to the Caremark PBM business

CVS

Inventory/ Total Assets

66

Rite-Aid has negative operating margins driven by low sales/ sq ft and low productivity

Operating Margin % 10%

80 80

Walgeen

-25%

-30%

60%

100

Rite Aid

-20%

Inventory Days of Sales

60

0% -10%

6.9%

42% 40%

5.8%

5%

32%

48

40

15%

20%

0%

Cvs Corp.

20

Cvs Corp.

Rite Aid

Rite Aid

CVS

Walgreen

Rite Aid

Walgeen

-8.0%

-10%

Sales/Sq feet CVS has lower contribution margin but higher sales per sq ft and sales per employee

Walgreen

-5%

0%

0

1000 900

Contribution Margin % 30

843

27

28

Sales/ Employee 500

813

843

407

813

400

21

800 20

300

600

600

429

388

233

249

Rite Aid

Walgreen

200

400

10

300

100

200 0

0 0

CvsCvs Corp. Corp.

RiteRite AidAid

Walgreen Walgreen

Cvs Corp.

CVS

Rite Aid

Walgeen

CVS has had a consistently higher operating margin– Rite-Aid had negative margins in 2008 Operating Margin

Percentage

10% 5% Cvs Corp. 0%

Rite Aid 2006

2007

2008

Walgreen

-5% -10% Years

Operating Margin

Percentage

10% 5% 0% -5%

Q1

Q2

Q3

Q4

Cvs Corp.

-10%

Rite Aid

-15%

Walgreen

-20% -25% -30% 2008

CVS carries less than 45 days of inventory whereas RAD and WAG carry more than 60 days Inventory (Days of Sales) 100 75 Cvs Corp. Rite Aid

50

CVs turnover may be driven by the PBM business

Walgreen 25 0 2006

2007

2008

Years

Inventory (Days of Sales) 100 75 Cvs Corp.

50

Rite Aid Walgreen

25 0 Q1

Q2

Q3 2008

Q4

Although CVS has faster inventory turnover, the competition is catching up

CVS has had consistently higher employee productivity than Rite-Aid and Walgreen Sales/Employee 600000

Dollars

500000 400000

Cvs Corp.

300000

Rite Aid

200000

Walgreen

100000 0 2006

2007

2008

Years

Sales/Employee 120000

Dollars

100000 80000

Cvs Corp.

60000

Rite Aid

40000

Walgreen

20000 0 Q1

Q2

Q3 2008

Q4

Rite-Aid has much lower sales per square foot than its rivals

Sales/Square foot 900

dollars

800 700 600

Cvs Corp.

500

Rite Aid

400

Walgreens

300 200 100 0 These numbers are for the retail segment

2006

2007

2008

years

Pls. note that the 2008 CVS number does not include Longs’ Drug store which have a much lower average of $598 per sq. ft

… and smaller, right-staffed stores

Avg Store Sq Foot 15000

13866

12500 10472

10000 5000 0 CVS

Rite aid

Walgreens

Em ployee/Store 40 30

34 29 23

20 10 0 CVS

Rite aid

Walgreens

Company-specific details

CVS Caremark is positioning itself as an integrated healthcare company

CVS covers most states except the North-West

CVS was primarily an east coast retailer till 2003

Minute Clinics are staffed by nurse practitioners and currently focus on acute conditions (e.g., Flu)

Its store-brand sales have increased 47% over the past four years

Key strategic initiatives at CVS Caremark •

Completed acquisition of Longs Drugs and Rx America – to gain strength on the West Coast

•

Successfully launched Proactive Pharmacy Care – a Pharmacy Benefits Management program– to compete against traditional PBM programs as well as drug retailers • Proven to improve adherence to prescriptions • Uses plan design based on a ‘Customer Engagement Engine’ that uses customer behavior, evidence-based medicine • already $8.9 BN in sales • More than 8 MM ExtraCare Health cards • 250 Maintenance Choice enterprise customers

•

Focusing on specialty pharmacy -- 30 conditions including hemophilia, MS, RA • 20 mail order pharmacies and 52 specialty retail pharmacies • generating revenue of $ 10+ BN

•

Pharmacy service initiative (PSI) and IT initiative (RxConnect ) to improve the prescription filling process

•

Launched call center to free up pharmacists time – and improve customer service

Walgreens has a rich history of innovation

•

1950 – self service stores

•

1968 – Child-proof containers

•

1981 – Satellite-linked stores

•

1991– POS scanners

•

1992 – Drive-through pharmacies

•

1999- online prescription history

•

2002 – multi-language prescription labels

•

2005 – online digital photo printing

Walgreens has a wide spread store network

Key strategic initiatives at Walgreens •

Slowing store growth

•

Re-inventing the customer experience • ‘Affordable Essentials’ program • Prescription Savings program has 1.7 MM+ members –offers discounts on more than 5000 generics; and 90-day supplies at a dollar a week • Optimizing assortment at a store level – to sell more front-end items • Optimizing pricing and promotions • Rolling out new ‘Customer-Centric Retailing (CCR)’ format • Enhance shopping experience by improving sightlines, layout and signage • Collaborating with vendors to leverage insights e.g., Baby care layout

•

Transforming community pharmacy by the POWER program (centralizing data entry, data review and clinical review of prescriptions) • Allows pharmacists to strengthen their role as trusted clinicians • Reduces overall pharmacy costs • Rolled out in all Florida stores and now launching in Arizona

Key strategic initiatives at Walgreens (contd.)

•

Expanding health & wellness and specialty pharmacy • 273 Take Care clinics and 364 Worksite Health Centers catering to 180+ enterprise clients and millions of consumers • Specialty/ Infusion centers

•

Rewiring for growth – driving major cost reduction and productivity gain • Strategic sourcing of indirect spend • Reduce corporate overhead and store labor • Balance workload to free up pharmacists’ time

Rite-Aid has a strong presence on the east coast and in select west coast markets

Source: Rite Aid presentation

Key strategic initiatives at Rite-Aid •

•

Focused store growth program –

Growth focused on key strategic markets

–

Segmented stores using sales and profitability performance (High EBITDA margin stores; High volume, lower EBITDA margin stores; Good volume; Low volume)

–

Emphasis on relocations

–

“Customer World” pharmacy centric store format prototype

Strengthen pharmacy operations –

Improve customer service using • ‘Ready when promised’ program • grow ‘Automated Courtesy Refill’ program • Use new ‘Nexgen’ KPIs • Focus on service at under-performing stores

–

Differentiated loyalty programs – senior “Living More”, Rx Savings Card

–

Focus on health and wellness programs

Key strategic initiatives at Rite-Aid (contd.) •

•

Improve front-end operations –

Continue to grow private brand penetration (currently 13% of front store)

–

Differentiating with GNC within-a-store

–

“Living More” senior loyalty program

–

Maximize prescription switches to OTC

–

Optimize front-end assortment and use new pricing model and ad zones to drive sales

Continue operational improvements –

Improve store productivity through implementation of best practices across stores

–

Inventory reduction initiatives without sacrificing customer satisfaction

–

Expenses aligned with sales level with continued focus on SG&A reduction initiatives

–

Reduction in supply chain costs