Is the Corner Drug Store back ?
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Note: This article erroneously stated the prison term of Franklin C. Brown. The error has been corrected.
I often wondered if the "corner" drug store was extinct. In my mind there was always a drug store on the corner in the "olden" days. In addition to the pharmacy in the back there was always the lunch counter on the side. If you were old enough you probably remember the milk shakes, burgers, and fries they offered.
Also, since I'm always on the lookout for new opportunities, how is the business doing overall?
In the town where I was born there was an old-fashioned drug store on the corner of Main and Center Streets. It was the kind of place where the owner was also the pharmacist and operated the cash register. I think there was a lunch counter too. Teenagers worked there after school. However, while I was still a kid it closed down. There is a bank at that location now.
Today it seems like nothing has really changed to a big degree. In the immediate area where I now live I see three stores that are under construction. Close by an existing store sits at the intersection of three major roads. And in my old hometown two major competitors opened pharmacies diagonally across from each other at a street corner: CVS (NYSE: CVS) and Walgreen Company (NYSE: WAG). One took over the location where the police station used to be.
It looks like CVS has grown over the last 48 years. Starting with 17 locations in 1964, CVS has exponentially increased store count to over 7,000 in 41 states plus Puerto Rico.
Growth occurred due to both new construction and acquisition. There were several large mergers in the mid-1990's and mid-2000's which contributed significantly. In 1997 CVS bought out Revco increasing store count by 2,500 and in 2004 acquired 1,268 Eckerd stores. Can CVS keep it up? Maybe there is room for expansion to other states and even within states. How about Canada? There are no CVS stores there.
Possibly as the result of the increase in the number of stores, revenue and earnings have grown more than five times and the stock price has increased nearly fourfold over the last ten years. The stock yields 1.4%. Warren Buffett has it in his portfolio although he has reduced exposure somewhat this year. He probably sees less value in the stock right now. Note that the current P/E of 17 is a bit above the 5-year average of 14.
CVS Earnings Per Share TTM data by YCharts
Walgreens, which takes credit for the malted milkshake, has 8,300 stores, the most in the industry today. Overall it's a smaller company with a market cap of $30B, which is half that of CVS.
Store count has also increased rapidly, rising by 33% since 2007. The current business model calls for locating freestanding stores on street corners and across from CVS stores if possible, similar to my old hometown. It has locations in all 50 states. Is there room for expansion?
Revenues have more than doubled and earnings have almost tripled over the last ten years. It has plenty of leftover cash and growth rates in-line with the industry. However, the stock price is only slightly higher than it was 10 years ago. It never really recovered from the financial crisis. It does pay a dividend, and the 3.1% yield is more than double that of CVS. You might need to be patient if contemplating an investment here.
WAG Revenue data by YCharts
Another competitor, the 3rd largest in the industry, Rite Aid (NYSE: RAD) is not doing well at all. In fact it needs resuscitation.
Former executives were involved in an accounting scandal in the early 2000's. CEO Martin Grass, son of company founder Alexander Grass, served 6 years in jail and Vice Chairman Franklin C. Brown also served time.
Earnings have collapsed into negative territory and revenues have been relatively flat since 2007. The company pays no dividend. The share price has suffered and is barely out of the penny stock range.
It doesn't appear that Rite Aid is on the corner anymore. I would stay away from them for now. It might be a good turnaround candidate someday.
RAD Revenue data by YCharts
So not much has changed over the years regarding drug stores except maybe no more lunch counters. CVS and Walgreen are growing and still have stores on the corner. We might have to build more roads to accommodate them. Sometimes not changing can be a good thing.
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