This Is Not Your Childhood Drugstore Anymore

According to a report by The Hartman Group, drugstores are now seen as a convenient shopping channel, with 24% of shopping trips described as "immediate consumption occasions." Shoppers at drugstores aren't just filling a prescription; they're also looking for food and beverages they'll likely consume within one hour of purchase. Welcome to America's new convenience store.

The days of Mom and Pop drugstores are pretty much gone. The drugstore industry is now dominated by two giants: Walgreen (NYSE: WAG  ) and CVS Caremark  (NYSE: CVS  ) . These two titans have more than 16,000 stores between them. Meanwhile, Rite Aid (NYSE: RAD  ) trails as a distant third.

Walgreen takes the high road
For Walgreen, it's been a long journey forward since Charles R. Walgreen opened a neighborhood drugstore in 1901, measuring a mere 50 feet by 20 feet. The company has now become the pharmacy that its competitors are measured by.

Part of this possibly has to do with the company's efforts to live by the adage of "doing well by doing good."  As such, they are one of America's most respected corporations.

The company has made a serious commitment to diversity & inclusion, especially in its efforts to include employees with disabilities. Walgreen determined in 2012 that they would have employees with disabilities make up 10% of its distribution center workforce and established a pilot program that began in Texas and is currently in place in Dallas, Houston, Chicago and New York, as well as parts of Wisconsin and Connecticut.

The company also has ramped up its commitment to being eco-friendly.  The retail giant has adopted an overall sustainability plan to reduce energy use by 20% by 2020 across all of its stores. This led to the construction of their Evanston, Illinois store, a "net zero" building that utilizes a number of sustainable strategies. This makes it the first dedicated retail space in the country that generates all of its energy on-site. Some of the combined technologies include solar panels and wind turbines, as well as the use of geothermal energy and LED lighting.

Walgreen's Evanston, Illinois pharmacy could be the solar-powered pharmacy of the future.

Walgreen reported November sales of $6.07 billion, an increase of 4.1% from $5.83 billion for the same month in fiscal 2013. Total front-end sales increased 3.2% compared with the same month in fiscal 2013, while comparable store front-end sales increased 1.9%. Customer traffic in comparable stores increased 0.8%, while basket size increased 1.1%. The company attributes the increase versus prior quarters to its promotional investment.

CVS Caremark needs to try harder
CVS Caremark might be in second place as far as size (they have 7,505 stores compared to Walgreen's 8,500+), but their growth has been steady since 1985. Revenues back then were about $1 billion. In 2012, they were $123 billion. Their ascent upward has been helped through the acquisition process, as CVS Caremark took over chains like Long Drugs, Sav-On and Osco and Eckerd stores.

2013 was a positive year for the company. While there were a few bumps in the road early in the year on the investment front, mainly due to having to delay share buybacks during a settlement negotiation with the Securities & Exchange Commission over how it disclosed sales of securities by employees, earnings were fine and came in ahead of Wall Street's expectations.

Rite Aid's stock price rallies
It's tough being a distant third in anything, and that's Rite Aid's slot in the chain drugstore market. They trail CVS Caremark and Walgreen in store numbers, with a mere 4,623, compared to more than 16,000 locations combined by those two industry giants.

While it might be tempting to overlook Rite Aid as an investment, recent stock performance indicates that the company might be worth taking a second look at. Rite Aid's stock has been trending upward, hitting new highs in early December. Over the last month, the company's shares have surged 15.94%, and 72.60% in the previous three months, outperforming the S&P 500, which gained 1.90% and 9.48% during the respective periods. There is anticipation for the company's third quarter results, which will be released on Dec. 19. Analysts will be watching to see if the trend upward in quarterly profits over the past year, due in part to its loyalty program and renovations that have expanded clinical-pharmacy services and health and wellness products, continues.

What's next for drugstores?
As the debate about health care rages, especially the implementation of Obamacare, analysts estimate this could add to pharmacy sales. Pharmacies have been actively touting the benefits and educating consumers about the Affordable Care Act. Of course, slow enrollment and the roll out of the legislation may end up negating any financial gains for the industry.

Still, drugstores continue to be an important focus for consumers. They also are worthy of an investor's attention, especially these three key industry players.


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