Amazon's Pharmacy News Rocks Competitors

In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Jason Moser about the latest headlines and earnings reports from Wall Street. They discuss the arrival of a new player in the pharmacy space and the disruption it has caused in pharmacy stocks, and look at how some pharmacy companies are positioned for the long term. They also go through the latest earnings reports from two of the biggest retailers and much more.

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This video was recorded on November 17, 2020.

Chris Hill: It's Tuesday, November 17th. Welcome to MarketFoolery. I'm Chris Hill, with me today, Mr. Jason Moser. Good to see you my friend.

Jason Moser: Good to see you.

Hill: We have two of the biggest retailers out with their latest earnings report; that is going to have to take a backseat today to the news from Amazon (AMZN -1.65%), which just announced the launch of Amazon Pharmacy here in the U.S.

You can order prescription drugs, have them delivered to your home, Prime members get discounts. And the reaction from the pharmacy stocks is pretty eye-popping. CVS Health (CVS -0.65%), Walgreens (WBA -1.18%), Rite Aid (RAD -51.21%), GoodRx (GDRX 1.72%), they are all getting hit, Jason.

Moser: Yeah, they are, and I understand why. I think this is likely an overreaction to an extent. And I harken back to you when Amazon announced its acquisition of Whole Foods, you remember the grocery store stocks, at that point, took a pretty steep nosedive on that news. And again, understandable. Amazon is extremely competitive and a big threat in a lot of ways. But you fast forward to today, and certainly leaders in the grocery space have recovered; I mean, they haven't been the most compelling investments in the world, but it wasn't fatal.

That said, this announcement from Amazon doesn't make the pharmacist jobs any easier. I mean, when we speak about CVS and Walgreens, those are companies that while they have big store fronts and they have that grocery dynamic to them, they do rely on that pharmacy, right? CVS, for example, pharmacy is more than 75% of their business. And so that really does matter. I understand the selling there, particularly when you look at what Amazon has done to-date. I mean, they've done a lot of the heavy-lifting in order to be able to compete in this industry. I think they're able to participate in this market in 45 states now, they accept most insurance, it's a massive, massive market opportunity, right, something like a $300 billion market. So, I think there are reasons for companies like CVS and Walgreens to be concerned.

I think there's probably a reason for something like GoodRx to be more concerned. And so, I understand the market's reaction to that more than perhaps the pessimism on the bigger companies like CVS today.

Hill: I'm glad you mentioned that, because that was the thing I was sort of scratching my head about. Like, I get that just from a purely numerical standpoint, shares of GoodRx falling close to 20% is worse than shares of CVS Health down 8% or 9%. But given the overall size of CVS Health, I don't know, in some ways I was more surprised by that drop than I was GoodRx.

Moser: Yeah, I understand where you're coming from. And again, I think part of that is just because you've got a market where multiples have, I think, expanded in a lot of cases, so there probably is a little bit of a valuation thing there. Again, probably an overreaction, a little bit of a knee-jerk reaction. And I will give CVS credit for being very proactive, in the sense that they've worked hard to diversify away from just that store base to become more things. They're trying to turn those stores really more into healthcare centers with things like the MinuteClinics and telemedicine offerings. But again, 75% of that business being tied to pharmacy today, they do depend on traffic in the pharmacy business.

I think when it comes to GoodRx you have to look at, first and foremost, what is GoodRx, like, how does it make its money? Because the service that GoodRx provides to consumers, to you and me, that's free, right, I mean you can use it, you don't have to pay anything for it. So, they earn their money from the core business which is tied to Pharmacy Benefit Managers, PBMs. And those are the entities, they manage the formularies and the prescription transactions between the consumers and the pharmacies.

And so, why does that matter? It matters because Amazon, ultimately, it seems like their endgame here is, they're ultimately trying to cut PBMs, Pharmacy Benefit Managers, out of the drug sales pipeline, essentially by going directly to consumers and health plans, whether it's employers or health plans or consumers, they're ultimately trying to more or less become a PBM. And Amazon has a very notorious [laughs] reputation for cutting prices. I mean, look at AWS as an example, I mean, they just cut prices, it seems like every week. And when your reason for being is ultimately to be the most customer-centric company on the face of the earth, customers are very sensitive to pricing and they like convenience, and those are two areas that Amazon specializes in. And so, again, when you look at how GoodRx makes its money, it becomes a little bit more clear why the reaction is the way it is today, because I think this is a bigger threat to its business model than something like a CVS or a Walgreens.

Hill: Let's move on to the big retail earnings today, and we'll start with Walmart (WMT 0.57%). Third quarter earnings highlighted by [laughs] e-commerce sales up 79%, which is just one of the eyepopping numbers out of Walmart. Revenue of just shy of $135 billion. Same-store sales in the U.S. were strong. I mean, this was a continuation of what we've seen the last couple of quarters out of Walmart.

Moser: Yeah, I was going to say, [laughs] it feels like we just hit "repeat" from our conversation on this last quarter, because there are a lot of similarities. You know, topline growth not lighting the world on fire, but 5.2% -- you know, 6.1% if you exclude currency effects -- that's pretty strong for a business this size dealing in a very competitive space in retail; U.S. comps up 6.4%.

And to your point regarding e-commerce. I mean, 79%, that's not surprising, I think we all kind of expected that. I'm not surprised; I am impressed. And I think that what really impresses me is that they've been able to keep on doing this quarter-in and quarter-out. And even with the tailwinds that we've seen in the pandemic economy, right. This 2020 we've seen tailwinds for a lot of these businesses, and Walmart is certainly one of them in regard to its e-commerce operations, among others. Last year, this same quarter, they grew their e-commerce operations 41%; that's nothing to turn your nose up at, I mean, that's pretty good considering. And so, to see them continue that and accelerate it, I think is really encouraging, it contributed approximately 570 basis points, 5.7% to comp sales this year. They are keeping costs under control, which is encouraging, I thought it was interesting to see that in the U.S. they're seeing trip consolidation.

And when it comes to Walmart and all of these big physical retailers, you want to look at transactions and the size of the tickets, right? How many tickets, and the size of the tickets; that gives you a better idea of consumer behavior. They're seeing trip consolidation, they noted in the call. And significantly, larger baskets resulted in an average ticket increase of about 24%, but transactions themselves actually fell 14%. So, people, they're conducting fewer transactions, but they're buying more. And I think it's reasonable to expect that to continue this quarter given what we know about the potential for -- you know, we're obviously seeing some flare-ups there, some spikes in some areas of the country regarding COVID. And I think that probably is something that that narrative probably plays out for the rest of this year and maybe a little bit into next year as well. So, you might see a little bit of that pantry stuffing come back into play again, people kind of getting in there and stockpiling a little bit. That certainly works really well for Walmart, because they're big and they're able to maintain a lot of inventory.

And speaking of inventory, inventory levels are healthy, up a little bit from the beginning of the year, flat basically over the same time last year, so they're not seeing any real shortages and I think they're well prepared for not only the holiday season, but I think, you know, as we try to get through these last few months before we can start looking forward to maybe this COVID abating a little bit, whether it's through vaccine or other measures, I think Walmart is going to be well prepared for it.

Hill: Interesting to see two bits of specific, not official guidance, but guidance on two topics that I think are on a lot of investors' minds; one is stockpiling, the other is holiday retail. And in both cases, Doug McMillon essentially said "we're prepared." He didn't -- at least if he said this, I didn't see this, but I didn't see him say, you know, we promise it's not going to be a repeat of what we saw early in the pandemic, but he was pretty clear that in terms of their inventory levels, they are very well prepared for the next few months. And then talking about holiday retail, again, he wasn't overly exuberant, but they're expecting a good holiday season.

Moser: Yeah. And, to holiday season, I mean, we're going to see a little bit of a different one this year. And honestly, [laughs] I hope this is a trend that continues long past the pandemic, is that we see instead of, you know, Black Friday and Cyber Monday, let's just make the holiday season what it is, right? I mean, let's just stretch this whole shopping season out, and let's just make it one long joyous occasion. Let's not focus on just a couple of days during these last couple of months.

And I think that's part of what will help them deal with, you know, what will be a holiday season that will be less focused on a couple of occasions, it'll be more focused on the long-term. And when I say long-term, that's in regard to the holiday season, so a couple of months.

And I think the other thing that they -- when they talk about being better prepared from an inventory perspective, I think part of that is taking some of the lessons from earlier in the year and understanding consumer behavior as this all started. They've gotten a bit more into controlling traffic in the stores early as opposed to being a little bit more reactive. And so, they're back to making sure that stores don't get overly crowded. They're back to -- I think they've actually placed a limit on how much toilet paper, [laughs] for example, you can buy again, so they're trying to, sort of, see around that corner based on what they learned earlier in the year.

So, yeah, I think that this is a team that has been paying very close attention to consumer behavior over the course of the year. And I think that you know for the retailers that do that and they're able to execute, then they can really employ those lessons learned, and it's to the businesses benefit. And I think that that will be the case here for Walmart.

Hill: Home Depot's (HD -0.31%) third quarter profits came in higher than expected. Overall sales up 24%. And I get that the stock is down maybe 3%, 4% today, Jason, we can get into why in a minute. But I was struck by the fact that we're now three quarters into the fiscal year for Home Depot, they've done $100 billion in revenue. For all of last fiscal year, they did $110 billion. So, they've almost done in three quarters what they did for all of last fiscal year.

Moser: Yeah, I think they quantified it in the call; in the first nine months of the year, they quantified it, they've seen revenue grow by $15 billion just in the first nine months. And so, you project that forward for this final quarter and you can get a good idea that, I mean, this 20%, 23% topline growth, which is very similar to what they chalked up last quarter, it's not an anomaly. I mean, Dan and I were talking about this before taping, and it is one of those things that, I mean, if you're a homeowner, then clearly, you're going to be spending time at a Home Depot or one of its competitors. And so, for Home Depot, this is just yet another quarter of just really impressive success. The comp store sales were up 24.1%. Comparable sales in the U.S. were up 24.6%. Earnings per share up 25.7% from the same period last year. I mean, it all just speaks to, we're at home a little bit more, we have some more time to get things done around the house, Home Depot is absolutely a beneficiary there.

And then, you look at the existing home base in the U.S. It is one that's fairly old, it's getting older, and that means that those homes require a little bit of upkeep. We're seeing, obviously, tremendous results from homebuilders, they're doing very well also. Which all just leads to there's demand, there's demand in housing, whether it's used or new homes, housing is just a very fascinating market these days.

And Home Depot, the numbers tells you that the traffic just keeps on [laughs] showing up; and I get it, I mean, I'm one of them. [laughs]

Hill: Why don't they have a loyalty program for people like you and me? I know that the professional contractor side of the business is important to Home Depot and they have a loyalty program in place for those professionals, but it's a little surprising to me that they don't have one for everyday consumers like you and me.

Moser: Yeah, I wonder if their perspective there -- and that would be an interesting point to research to see if there's any language from management regarding that, because I think it could be one of two things. Either they feel like consumers already -- maybe they already participate to some degree with -- you know, if you get, like, a rewards program with whatever card you're using, whether it's a Visa or MasterCard or whatever card you're using. Maybe they feel like consumers benefit from that, and that's satisfactory. I mean, maybe they just kind of look at it and feel like, you know what, we don't need to, you people kind of need us. [laughs] So, I mean, consumers are going to go there regardless. If that is their perspective, I do get it; like, I'm going to go to Home Depot whether they have a loyalty program or not. Now, if they had one, that would be cool, I would love it, I would certainly take advantage of it, because I go there a whole lot. But that'd be an interesting thing to research, because I'm not quite sure.

I do think -- I don't know if you saw the news, it's not loyalty related, but I don't know if you saw the news that they recently completed an acquisition here just shortly ago, with HD Supply, did you see anything on that?

Hill: Yeah, Barker and I talked about that on yesterday's show.

Moser: Yeah, I think that's going to be a compelling little add to the business, given the market opportunity, given where Home Depot is today. I mean, why would you invest in Home Depot today? I mean, you're not really investing in it for that mammoth capital gains, right? You're investing in it for steady Eddie, nice dividend. I mean, I think they just paid their 135th consecutive dividend. So, you're investing in it more for that constant flow of income.

But this acquisition, I think, of HD Supply Holdings will give them additional shares in that Maintenance, Repair, and Operations space, that MRO space, that really caters to that pro customer that they value so highly. So, I do think that's going to be an additional market opportunity they'll be able to continue to exploit in the coming years.

Yeah, I'd be interested to know more about that loyalty program. I think that's a big question, because if you look at some of the numbers, we talk about transactions and tickets for Walmart. I mean, Home Depot's comp average ticket increased 10%, comp transactions increased 13%; that's the second quarter, at least in a row, of double-digit growth in both categories. But the thing that stood out to me above all was that during the third quarter big ticket comp transactions, which is those transactions over $1,000, that was up 23%. Think about that for a second. I mean, people just go in there and drop $1,000 or more like it's nobody's business, that's really impressive. I think that goes to show you the strength of that business. And to the question on loyalty and loyalty programs, maybe they just don't feel like they need one. I mean, it would be cool if they had one, but they just don't feel like they need it.

Hill: Jason Moser, we're out of time, thanks for being here.

Moser: Thank you.

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd, I'm Chris Hill, thanks for listening, we'll see you tomorrow.