A Look at Bill Gates' Investment in Walgreens

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Mar 24, 2015

Bill Gates (Trades, Portfolio) is one of the smartest businessmen in the world. He founded Microsoft (MSFT, Financial) and grew it to the world's largest software maker and monopolized the PC world. Bill Gates (Trades, Portfolio) was the richest man for 15 consecutive years.

In addition to being a successful entrepreneur, Bill Gates (Trades, Portfolio) is a firm believer of philanthropy. He, along with his wife Melinda Gates, founded the Bill and Melinda Gates Foundation, the largest private foundation in the world. It has an endowment of over $42 billion out of which ~$28 billion was donated by Bill Gates (Trades, Portfolio) himself. The foundation trust invests undistributed assets, with the exclusive goal of maximizing the return on investment. Last quarter, the foundation purchased 3,475,398 million shares of Walgreens Boots Alliance (WBA). Here's a look at the company in detail.

Walgreens, together with its subsidiaries, operates the largest drugstore chain in the United States with net sales of $76.4 billion in the fiscal year ended August 31, 2014. Walgreens provides services to customers with convenient, Omni-channel access to consumer goods and services, pharmacy and health and wellness services in communities across America. Walgreens provide its services through drugstores, as well as through mail, telephone, online and our mobile application. As of August 31, 2014, Walgreens operated 8,309 locations in 50 states, the District of Columbia, Puerto Rico and U.S. Virgin Islands. On December 31, 2014, Walgreens completed acquisition of Alliance Boots. Alliance Boots is a leading international, pharmacy-led health and beauty retailing and pharmaceutical wholesaling and distribution business. Alliance Boots run their businesses in 11 countries and operated more than 4,600 health and beauty retail stores, of which more than 4,450 had a pharmacy with a growing online presence.

Last quarter, Walgreens posted solid results across both its pharmacy and retail product business. Strong holiday season and good cost control across the enterprise helped the company’s result. For the full quarter sales were a record $19.6 billion, up 6.7% from 18.3 billion a year ago. Adjusted operating income for the quarter was $1.14 billion up 3.5 % from $1.1 billion in the first quarter 2014. First quarter adjusted EPS was $0.81, up 12.5 % from $0.72 in the same quarter last year. Segmentwise, the company’s retail product business saw a total comparable sales increase of 1.5% year over year helped by a 4.2% increase in basket size. Pharmacy segment also did well with the company’s prescription sales growing 9%.

On the Pharmacy side, the company’s strategy is to focus on wining & gaining share with high-value seniors through preferred relationship with Medicare Part D plans. While this business carries lower margins than the rest of the company’s script business, it remains quite attractive as it drives incremental revenues and gross profit dollars. This strategy seems to be working, and the company’s market share in retail pharmacy increased 10 basis points last quarter.

The company is also making good progress in terms of driving its front end or retail product comp sales. The company’s focus is to drive profitable growth and achieve the right balance between sales and margin. There are three key elements of this strategy. First one is to focus on enhancing its product mix towards more upscale retail products to drive higher margins. Second one is to drive supply chain efficiencies by removing excess costs and thereby improving overall store productivity. And third is to leverage its Balance Reward loyalty program to drive valuable insights that will allow it to better target its promotional investments. This strategy is beginning to pay dividends and last quarter marked the third quarter in a row where the company saw year-over-year improvement in retail product gross margin.

Going forward, the company is expecting the strength it saw in the last quarter to continue for rest of the current fiscal year (ending August). For FY2016 the company goal is to achieve $1 billion in cost saving and post $4.24-$4.65 in EPS. Longer term the company aims to take Walgreens global. The recently completed merger of Walgreens and Alliance Boots is a step in the right direction.

Walgreens is trading at 17.75 times FY2016 (ending August) EPS. According to sell side estimates, the company’s EPS is expected to grow 12% in the current fiscal year and 21% next fiscal year. The company has a dividend yield of 1.70%. Out of 21 analysts covering the company, five are positive and have buy recommendations, 15 have hold ratings and one has a sell rating. Given the company’s good growth prospects and reasonable valuations, I recommended buying the stock.