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Perspectives

Walgreens and CVS vs. Amazon

by Fortem Financial July 2, 2018

Looking at Walgreens adjusted 2018 third quarter (Q3) earnings per share (EPS) of $1.53 and revenues of $34.33 billion (surpassing analysts’ expectations of $1.47 and revenues and $33.65 billion respectively), we are reminded of the importance for investors to control emotional responses.

After beating on earnings, and raising its quarterly common dividend by 10% to $0.44 a share, along with announcing a new $10 billion share repurchase program, which is scheduled to be completed in the next 3 years absent major M&A, Walgreens and CVS together lost nearly $10 billion in market value.  Why?  It would appear that Amazon’s announcement of its acquisition of PillPack caused the selloff.  PillPack has pharmacy license in 49 states of the US and is expected to generate revenue of just about $100 million this year.  Privately-held PillPack caters to patients who take multiple daily prescriptions through delivery of medications in pre-sorted dose packaging and the coordination of refills and renewals.  In our opinion, the selloff in Walgreens and CVS is an overreaction to the news.

We believe that pharmacy work is much more complex than delivering pills or packages, and it will take significant investments, time, and resolve before Amazon can catch up with Walgreens and CVS to become a meaningful threat. That said, the race to serve customers better and lower healthcare cost is a very worthy competition that should be welcomed by every member in the society. We believe the Omni channel positioning is a crucial advantage for Walgreens and CVS, and both companies’ immense financial resources will allow them to innovate and thrive. In particular, making pharmacy stores perform significantly more primary care functions, and becoming the front line of healthcare, is a winning proposition, in our view. That said, it will take a while before the dust settles, as No.1, Walgreens has yet to nail down all the details for its long-term plan; and No.2, all the partnership initiatives will take time to try out and roll out, and to exhibit notable impact on Walgreens’ financials. Brick-mortar stores can compete and win in the race against Amazon, if they can and are willing to invest, have the right strategy, and are good at executing. Best Buy, Walmart, and Target, to name a few, have shown they can compete successfully on the E-commerce side by utilizing their physical presence to their advantage. We believe Walgreens, and CVS can do the same. Patience is gold.

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Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017, 2018 Five Star Wealth Managers!

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The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided. Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf
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