Drugstore operator Walgreen Co. said Thursday it will spend about $429 million to buy online retailer drugstore.com in a deal that gives it access to 3 million online customers.
The largest U.S. drugstore operator will give drugstore.com shareholders $3.80 in cash for each of their shares _ more than double the $1.79 closing price of drugstore.com's stock on Wednesday. On Thursday the stock jumped $2.03 to close at $3.82.
The acquisition will add about 60,000 products to Walgreen's online offerings, and the Deerfield, Ill., company said it will significantly speed up its online strategy. Drugstore.com is one of the largest online health and beauty retailers, and Walgreen has said those products are an important part of its strategy. Drugstore.com's websites include Beauty.com, SkinStore.com and VisionDirect.com. Despite its name, it does not have a pharmacy business, as it sold that division in July 2010.
Walgreen launched a mobile phone app in 2010 that allows customers to order refills of their prescriptions by scanning the bar code on their medications. The app is available for free. The company says more than 1 million customers use its text alert service, which sends text messages to let them know their prescription is ready for pickup. Walgreen started the text alert feature in March 2010. Drugstore.com's Beauty.com business launched an iPhone app a year ago.
Competitor CVS Caremark Corp. has several apps that can help customers find nearby stores, get a prescription refilled, transfer prescription information, or schedule flu shots.
Scotia Capital analyst Patricia A. Baker said it is imperative for retailers like Walgreen to develop an online presence going forward. "People are shifting their behaviors," she said. "The brick-and-mortar store's not going to die, but it's certainly going to be augmented by the convenience of being able to shop for stuff online."
The business trade publication Internet Retailer says drugstore.com is the third largest online health and beauty retailer, and the 46th-largest online retailer overall. Drugstore.com has not reported a profit in the last decade despite its growing sales, although the company said it expects a profit in 2011. In 2010 its revenue grew 24 percent to $456.5 million, and it expects more than $750 million in annual revenue by 2013.
Drugstore chains like Walgreen and CVS Caremark don't disclose how much business they do online. However, Internet Retailer said Walgreen is the 68th-largest online retailer. The company runs about 7,700 stores around the country.
Sona Chawla, Walgreen's president of e-commerce, said Walgreen wants to give customers options and does not consider its online business separate from business at its retail stores. She said the company has seen significant traffic growth over the last few years, and Walgreen's top online categories are photo, pharmacy, beauty and personal care, and home medical care.
In an interview with the Associated Press, Chawla said the company plans to expand its mobile phone and online offerings. Chawla said drugstore.com placed less emphasis on apps and more on its mobile phone website, which represents all of its product categories.
Earlier this month, Walgreen said it is selling its pharmacy benefits management operation to Catalyst Health Solutions Inc. for $525 million in order to focus more on core businesses.
Morningstar analyst Matthew Coffina said it seems the money from that deal is "burning a hole" in Walgreen's pocket, and the company wants to spend it on something. He said e-commerce has growth potential, but he's not sure the drugstore operator will get a very good return on its drugstore.com investment.
"The question is how much money can you make when you're selling low-end drugstore-type products and have to pay shipping costs on that," he said. "There's not a huge value proposition there, I don't think."
The price Walgreen pays will total about $409 million, as it picks up drugstore.com's $20 million in cash. Walgreen will fund the deal with existing cash.
Drugstore.com shareholders still must approve the acquisition, but the Bellevue, Wash., company's board has already unanimously approved it.
Walgreen said the deal, which is expected to close by the end of June, will dilute fourth-quarter earnings per share for fiscal 2011 by about 3 cents due to one-time costs.
Walgreen said Tuesday its fiscal second-quarter earnings climbed 10 percent. The drugstore operator earned $739 million, or 80 cents per share, in the quarter that ended Feb. 28. Revenue climbed 9 percent to $18.5 billion.
But analysts said the company's relatively flat gross profit margin _ which had expanded in recent quarters _ left them disappointed, and the stock tanked after earnings were released.
Walgreen shares rose 12 cents to close at $39.95 Thursday.
Murphy reported from Indianapolis.