Walgreens; Financial Statement Analysts

Walgreens offers an old-fashioned tonic for fiscal fitness: quality over quantity and homespun growth rather than growth through acquisitions. It works. While Walgreen has fewer stores than its closest rival CVS, it is #1 in the nation in sales. (Hoover’s Inc, 2007)

Walgreens operates about 6,000 stores in 49 states and Puerto Rico, and has three mail order facilities. Prescription drugs account for 65% of sales; the rest comes from general merchandise, over-the-counter medications, cosmetics, and groceries. Walgreen usually builds rather than buys stores, so it can pick prime locations. For added convenience, more than two-thirds of its stores offer drive-through pharmacies, and almost all offer one-hour photo processing. (Hoover’s Inc, 2007)

Within the last 3 years Walgreen is growing by leaps and bounds. Some of the here are a few highlights and contributing factors to Walgreens growing success.

In 2005 Walgreens opened its 5,000th store in Richmond, Va. In 2006 Walgreens announced a new CEO (Jeffrey A. Rein). Walgreen also acquired Happy Harry’s drugstore chain, which added 76 stores to the growing number of locations. In 2006, Walgreens began offering in-store health clinics (Health Corner Clinics), with nurse practitioners treating walk-in patients for common ailments. Later that year, clinics opened in St. Louis, Kansas City, Chicago and Atlanta.” In 2007 Walgreens acquired Take Care Health Systems and with the acquisition, it expects to have more than 400 clinics by the end of 2008. (Walgreen.com, 2007)

Walgreens solid strategies towards conscious consumers values has successful expand and lead to growing their service and product portfolio to meet the needs of their current and future customers. In order to continue to grow and meet the needs;

Walgreen is focusing on Organic store growth, and taking in consider acquisitions; increasing market share through innovation and execution; Leveraging the companies economic size; Reacting quickly to customers’ changing needs; Offerings beyond traditional pharmacy, Health Services’; and Retaining and attracting top talent. (Walgreen.com, 2007)

This analyst of Walgreens is focused the accounting aspects of balance sheets and ratios compare to one of Walgreens biggest competitors, CVS.

Company BackgroundWalgreensIn 1901 Chicago pharmacist Charles Walgreen borrowed $2,000 from his father for a down payment on his first drugstore. He sold a half interest in his first store in 1909 and bought a second, where he installed a large soda fountain and began serving lunch. In 1916 seven stores consolidated under the corporate name Walgreen Co. By 1920 there were 20 stores in Chicago, with sales of $1.55 million. The firm was first listed on the NYSE in 1927; two years later its 397 stores in 87 cities had sales of $47 million. (Walgreen.com, 2007)

The company did comparatively well during the Great Depression. Although average sales per store dropped between 1931 and 1935, per-store earnings went up, thanks to a chain wide emphasis on efficiency. By 1940 Walgreen had 489 stores, but the chain shrank during WWII when unprofitable stores were closed. (Walgreen.com, 2007) The 1950s saw a major change in the way drugstores did business.

Walgreen was an early leader in self-service merchandising, opening its first self-serve store in 1952; it had 22 by the end of 1953. Between 1950 and in the1960, as small, older stores were replaced with larger, more efficient, self-service units, the total number of stores in the chain increased only about 10%, but sales grew by more than 90%. (Walgreen.com, 2007)

The 1970s and 1980s brought rapid growth and modernization to the chain. The company opened its 1,000th store in 1984. Two years later Walgreen acquired 66 Medi Mart drugstores in five northeastern states.(Walgreen.com, 2007)

Iin the 1990, Walgreen began its Healthcare Plus subsidiary to provide prescriptions by mail. (By 1997 the by-mail service was filling as many prescriptions per day as about 60 Walgreen stores do.) Along with other independent drugstores, it helped set up Pharmacy Direct Network in 1994 to manage prescription drug programs for group health plans. And In 1995 Walgreen launched a prescription benefits management company, WHP Health Initiatives, to target small to medium-sized employers and HMOs in the top 28 Walgreen markets. Walgreen continued building stores and entering new markets in 1996, including Las Vegas and Dallas. (Walgreen.com, 2007)

The company opened a full-service pharmacy online in 1999 and added more than 450 stores in 2000. During 2002 Walgreen opened 471 stores and closed 108. To support its rapid expansion, two new distribution centers opened in Jupiter, Florida, and Dallas.

Walgreen In its first significant acquisition in nearly 20 years, Walgreen agreed to buy 16 drugstores in the Portland, Oregon, and Vancouver, Washington, metro areas from privately held Hi-School Pharmacy in 2003. Overall, in 2003 the company opened 430 stores and closed 86 (75 of which were relocated). In 2004 Walgreen added 355 new outlets (after store closings) to its store count and opened a distribution center in Moreno Valley, California. (Walgreen.com, 2007)

CVSCVS/Caremark (formerly CVS) interprets the scrawl of more US doctors than anyone. The CVS pharmacy chain fills more prescriptions at more drugstores than any other drugstore operator, although it trails rival Walgreen in total sales. Following its acquisitions of the Eckerd chain and stores from Albertsons, CVS operates more than 6,200 stores in some 40 states.

More recently, CVS purchased prescription benefits management (PBM) firm Caremark Rx for about $26.5 billion. Caremark was combined with CVS’s PBM and specialty pharmacy subsidiary PharmaCare Management Services, which offered managed-care drug programs to insurers, employers, and other healthcare plan providers, to form Caremark Pharmacy Services. (CVS; 2007)

Operations and Product/ServicesWith more prescription drug business going to managed-care health plans, convenience has trumped price in the race to attract new customers. (Co-pays are the same at any chain, and sick folks are often short on patience.) Walgreen has led the movement in creating a “convenience drugstore” chain with freestanding stores.

The strategy has several advantages. Walgreen’s freestanding stores are more visible than those in strip malls and offer shoppers ample parking and easy in-and-out access. About a fifth of its stores are open 24 hours a day and the abundance of drive-through pharmacies adds to the chain’s convenience offerings. Because convenience also means being closer to customers, Walgreen builds new outlets at high-traffic locations (sometimes relocating new stores to better locations just blocks away). (Hoover’s Inc, 2007)

In a bid to grow sales and differentiate itself from pharmacy rivals, such as CVS, Walgreen is adding low-priced basic apparel to the merchandise mix in all of its stores. The offering includes a variety of branded and private label garments, from bras to sweat suits, and will sell for less than $50. (Hoover’s Inc, 2007)

Stung by the move by some employers to mail-order prescription services, Walgreen has been expanding its own mail-order business from about $1.4 billion in annual sales to more than $5 billion. (Hoover’s Inc, 2007)

While Walgreen follows a long-held strategy of building new stores rather than acquiring others, it has made several exceptions in recent years. Most recently, it agreed to acquire 53 pharmacies and other assets from Familymeds Group, for about $60 million. To quickly establish a presence in and around Delaware, Walgreen acquired the Happy Harry’s regional drugstore chain in mid-2006.

(Happy Harry’s operates about 75 stores in Delaware, Maryland, New Jersey, and Pennsylvania.) Walgreen has also agreed to acquire Illinois-based Option Care, a specialty pharmacy and home infusion provider with more than 100 stores in 34 states, for about $850 million. Previously, it agreed to buy Home Pharmacy of California, a provider of infusion and specialty pharmacy services. (Hoover’s Inc, 2007)

To support its growth, Walgreen plans to open a new distribution center in South Carolina in 2007, followed by another such facility slated to open in Connecticut in 2009. The company expects to increase its store count by about 500 outlets this year. Walgreen’s goal is to have more than 7,000stores by 2010. (Hoover’s Inc, 2007)

Walgreen also provides additional services to pharmacy patients and prescription drug and medical plans through Walgreens Health Services. The company’s Walgreens Health Initiatives subsidiary offers specialty pharmacy, mail-order pharmacy, and pharmacy benefits management services. To boost prescription sales and foster customer loyalty, Walgreen is partnering with Take Care Health Systems to open Health Corner Clinics inside its stores.

(In May Walgreen acquired the in-store health clinic operator in an all-cash deal.) As a result of the acquisition of Take Care Health Systems, Walgreen expects to have more than 400 clinics within its stores by the end of 2008 (up from about 60 currently). The clinics are staffed by nurse practitioners. (Hoover’s Inc, 2007)

Financial AnalysisAnalyzing the operating revenue and operating losses for Walgreens in the year 2007. Operating revenue is in a steady incline for the last three years, however when looking at 2007 more closely, you can see that in third quarter Walgreens stated to decline.

The liquid assets of Walgreen for the last three years seen a spick in 2006, however in 2007 the was a significant decrease in cash and equivalents. Comparing Walgreens to the its competitor, CVS; in the year of 2007, the graph show CVS is holding more cash and equivalents then WAG.

Viewing the working capital graphs above, Walgreens has seen a steady decline in the past three year in it is working capital (current assets – current liabilities), Since Walgreens is still in the positive, its still will be able to pay its liabilities if need be.

Here is Walgreens current ratio (current assets / current liabilities) with the firm being in the positive we can conclude that Walgreens is in a good position to pay its current bills. Along with Walgreens, CVS is also in the positive.

Quick ratio (cash + accounts receivable / current liabilities) is also know as acid – test ratio. Anylaizing the graphs above, you can concluded if Walgreens need to pay its bills but not sell its inventory, would they be able to do it? Yes, they would according to the above information.

Activity measures focuses on the relationship between asset level and sales, (i.e turnover) The following graphs will help with the activity measures analysts of Walgreens and its two main competitors. (Marshall, McManus, and Viele, 2007) For the past three years, the asset turnover graph shows Walgreens is efficient in their processes which relate to generating revenue. Out of the three companies, Walgreens is 1 to 1.5 points above its competition.

The sooner an account receivable can be collected the sooner cash is available to the firm. On average Walgreens is taking about 14 days. When compared to its competitors Walgreens is better then CVS.

Return on Investment (ROI) and Return on Equity (ROE) are part of the Profitability measures. Each of the measurements under profitability are related to income and the different ways it can be measured for a firm. The following graphs will illustrate Walgreens Profitability and also compare it to Walgreens main competitor.

In 2006 Walgreens rose to 18.9 but then fell to 18.4 in 2007. Even though Walgreens ROE fell, the amount of return is grater with Walgreen then from CVS.

In 2006 Walgreens rose to 18.9 but then fell to 18.4 in 2007. Even though Walgreens ROE fell, the amount of return is grater with Walgreen then from CVS.

With the price/earnings ratio, I can quickly see that market price of Walgreens in grater then CVS. Over the past three years the P/E ratio of Walgreens has fallen about a point in 2006, and then increased by half a point.

Dividend payout ratio for Walgreens in the past three year has been flat, however it still has a higher payout ratio then CVS for the year 2007.

Common Size Balance Sheet Comparison

Common Size Income Statement Comparison

Financial Ratio Comparison

When comparing different companies or different time periods, a Financial Ratio report can help put the companies or time periods in a quick and easy analysis table. The below charts and graphs will illustrate the analyze that can be done on with this report. Liquidity measures the working capital, current ratio, and acid-test ratio. The effects of the inventory cost-flow assumption on working capital. At Walgreens, they utilize the Last in First out (LIFO) cost flow, while CVS utilizes First in First out (FIFO). (Marshall, McManus, and Viele, 2008)

Reference:Marshall, D.H., McManus, W.W., & Viele, D.F. (2008). Accounting: What the numbers mean, 8th ed. New York: McGraw-Hill Hoover’s Company Records(WAG), (2007, Nov 10). In-depth Records. Retrieved February 10, 2008, from Hoover’s Inc Web site: http://w3.lexisnexis.com.library.capella.edu/dossier/companyreporting/resolvefs.do?prod=CD&host=Rosetta_US_Academic&cdcomp=6_T75656748&reportKey=snapshot_report&docLinkId=5CADFED7E16F7D4266BCDB71E45F1DCBC203AE7CF0724DCADD7DD225E6D4F6C4C94C2AA0EDADAC358AF7EC0664BD8CB6360CB54158AFADBEF5C69A7B527BA6A1 Walgreen.com, (Copyright 2007).

Walgreen.com. Retrieved February 10, 2008, from Walgreens Historical Highlights Web site: http://www.walgreens.com/about/press/facts/fact3.htmlhttp://news.walgreens.com/images/27/2006wagar.pdf U.S. Institutional Database, (2007), CVS. Retrieved February 10, 2008; http://www.lexisnexis.com.library.capella.edu/us/lnacademic/search/companyDossiersubmitForm.do

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