Today's stock market
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Tech stocks reversed course from recent weakness, with the Technology Select Sector SPDR ETF (NYSEMKT:XLK) rising 1.2%. The telecom sector also led; the iShares US Telecommunications ETF (NYSEMKT:IYZ) added 1.6%.
Amazon enters the pharmacy business
Amazon sent shivers through the pharmacy industry today when it announced it is acquiring online pharmacy PillPack for $1 billion. Amazon's stock rose 2.5% on the news, but shares of Walgreens, CVS Health, and Rite Aid were hammered, as the online giant appears poised to disrupt yet another industry.
Privately held PillPack was founded just five years ago by a pharmacist and an engineer with the goal of simplifying the lives of people who take multiple medications a day. The company has a system for creating personalized rolls of packages of pre-sorted pills that are printed with the day and time they should be taken. The company also has a software system to help customers manage refills, renewals, and copays.
"PillPack's visionary team has a combination of deep pharmacy experience and a focus on technology," said Amazon Worldwide Consumer CEO Jeff Wilke. "PillPack is meaningfully improving its customers' lives, and we want to help them continue making it easy for people to save time, simplify their lives, and feel healthier. We're excited to see what we can do together on behalf of customers over time."
Walmart had reportedly been interested in PillPack, but clearly Amazon thought the innovative little company was a good way to launch its widely anticipated entry into the prescription market. The company expects the deal to close in the second half of 2018.
Walgreens reports good results, but who cares?
Walgreens Boots Alliance reported fiscal third-quarter results that beat expectations, in addition to raising forward guidance, increasing the dividend 10%, and announcing a $10 billion share repurchase program. Nevertheless, impending competition from Amazon drowned out all that good news, and the stock fell 9.9%.
Sales by the newest member of the Dow Jones Industrial Average increased 14% to $34.3 billion and adjusted earnings per share jumped 15% to $1.53. Analysts had been expecting Walgreens to earn $1.48 per share on sales of $34.1 billion.The company raised the low end of EPS guidance for the full year by $0.05 to a range of $5.90 to $6.05.
The inclusion of results from stores acquired from Rite Aid obscured some trouble areas in Walgreen's business. U.S. pharmacy sales increased 15% due to the new stores, but comparable-store sales declined 1.2%. Internationally, sales decreased 2.1% on a constant currency basis, with comparable sales falling 1.4%. Companywide gross margin declined to 22.7% from 23.7% in the period a year ago.
Fielding questions about the Amazon move in the conference call, co-COO Alex Gourlay said, "We don't see any reason to be worried." He and CEO Stefano Pessina tried to reassure analysts that Walgreens had seen this coming and is also working on expanding services, plus PillPack is small, and the pharmacy world is complex.
Investors were not so sanguine about the threat from Amazon, with today's market response reminiscent of what happened to grocery stocks when Amazon bought Whole Foods last summer. But those companies have generally shown themselves to be resilient against the threat, so it seems at least possible that Walgreens could manage the same feat.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jim Crumly owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.