Walgreens Struggling to Improve Profitability

Vishnu Lekraj: Walgreens reported results this morning that continue to show the firm struggling to improve its profitability. Over the past several years, the firm has pursued a strategy where it's trying to be a preferred pharmacy at many PBM narrow networks. This has led the firm to receive some discounted pricing from PBMs, which has pressured profitability in the back end of the store.

In order to offset this trend, the firm has tried to drive sales of front-end products, which consist of convenience goods and health products. However, this strategy has yet to bear fruit, as front-end sales have decreased ever quarter over the past several years. We are concerned about this trend, but this falls in line with the long term thesis for the retail pharmacy. We are reaffirming our no moat rating for the firm, and our $73 fair value estimate. Thus, we believe investors should look at the firm cautiously and hold the stock if they still own it.