Running head: WALGREEN COMPREHENSIVE FINANCIAL ANALYSIS
A Financial Analysis of Walgreen in the Competitive Pharmacy Marketplace
Roger Anderson, Leslie Burgy, Margie Pokorski, and Carolyn Sucaet
Siena Heights University
LDR 640 Financial Systems Management
Prof. Lihua Dishman
May 20, 2013
1
WALGREEN COMPREHENSIVE FINANCIAL ANALYSIS
Abstract
“CVS and Walgreen they’re the Coca-Cola and PepsiCo of the retail pharmacy business.
Together they have more than 15,500 stores in all 50 states and the District of Columbia,
combined annual sales of almost $180 billion and nearly 450,000 full-time employees” (Aluise,
2012). Rite Aid has about 4,650 stores in 31 states and is building momentum as a top
competitor by reporting their shares were the highest price in more than three years. Each
company has employed strategies and campaigns to capture more market share and improve the
financial viability of their company. Walgreen’s trend analysis for the past three years shows a
decline from 2011 to 2012. A peer-group financial analysis review of Walgreen and its two
competitors CVS and Rite Aid shows how each company performed in 2012 and how they
benchmark against each other. Walgreen has positioned itself in the global market through a
strategic partnership. Walgreen may be leading the way as presented in their financial
statements, but may be showing some symptoms of financial distress due to a missed strategy in
2012. These symptoms may need to be remedied soon as its competitors are waiting in the
wings to take the lead.
Keywords: Walgreen, financial trends, ratios, peer group analysis, strategy
2
WALGREEN COMPREHENSIVE FINANCIAL ANALYSIS
3
A Financial Analysis of Walgreen in the Competitive Pharmacy Marketplace
New drugstores are being built on the corner of every major intersection with a
competitor adjacent to it. Have you ever wondered how drugstore companies can afford to
purchase these buildings in prime locations and compete against each other financially? Which
drugstore is healthier, Walgreen, CVS, or Rite Aid ? The State of Michigan underwent a major
recession in 2008 due to the bankruptcy of the auto industry. It would appear that most
businesses would have experienced the same consequences. “Although pharmacy sales
weathered the recession well, growth in the $223 billion market has been relatively flat over the
past five years, according to IBIS World analysts” (Aluise, 2012). This paper will explore the
financial viability of Walgreen, Inc. and how it fares against its major competitors CVS and Rite
Aid. A financial analysis will be presented using the following financial ratios: the liquidity
ratios, the solvency ratios, asset management ratios, profitability ratios, and market value ratios.
These ratios will assist in making assumptions about Walgreen’s current state, trends, and
recommendations for future strategies. The next time you visit Walgreen on the “corner of
healthy and happy” (Walgreens), or its major competitors, you will have a better understanding
of their current financial state and future position.
The History of Walgreen and Current Milestones
Walgreen was founded in 1901 by Charles R. Walgreen, Sr. who purchased a Chicago
drugstore where he worked as a pharmacist. After opening the initial store headquartered in
Deerfield, Illinois, he began opening subsequent stores which developed into a network of
drugstores in the United States. “As of April 1, 2013, it operated 8,057 drugstores in 50 states,
the District of Columbia, and Puerto Rico. The company also operates approximately 700
WALGREEN COMPREHENSIVE FINANCIAL ANALYSIS
4
worksite health, and wellness centers, and in-store convenient care clinics in the United States”
(Walgreens). Major milestones over the years include providing
specialty pharmacy services for managing complex and chronic health conditions;
customer’s infusion therapy services consisting of administration of intravenous
medications for cancer treatments, chronic pain heart failure, and other infections and
disorders; and clinical services, such as laboratory monitoring, medication profile review,
nutritional assessments, and patient and caregiver education. In addition, the company
operates Take Care Clinics to treat patients, give prescriptions, and administer
immunizations and other vaccines (Walgreens our past, 2013).
In 2012 Walgreens entered into a transaction with Alliance Boots, an international
pharmacy health and beauty group “to create the first global pharmacy-led health and wellbeing
enterprise” (Walgreens our past, 2013). Walgreen was also named to “Fast Company
magazine’s list of Most Innovative Health Care Companies” (Walgreen co. reports fiscal 2012
fourth quarter and full year results, 2012). Walgreen’s strategy is to transform their traditional
drugstores into “retail health and daily living store, creating community-centric healthcare
integration with expanded pharmacy, health and wellness solutions” (Walgreen co. form 10-K,
2012, p. 4).
Financial Statements Analysis Using Financial Ratios
Four groups of financial ratios are useful tools to analyze a firm’s performance in relation
to itself, its competitors, and within the industry. The groups of ratios are classified as liquidity,
asset efficiency or activity, profitability, and leverage ratios. Liquidity ratios indicate how well
an organization is able to pay their short-term debts. Asset efficiency or activity ratios measure
management’s effectiveness at using its assets and liabilities internally. An improvement in
WALGREEN COMPREHENSIVE FINANCIAL ANALYSIS
5
efficiency ratios usually translates to improve profitability. Profitability ratios evaluate a firm’s
“ability to generate earnings as compared to its expenses and other relevant costs” (Investopedia,
n.d.). Leverage ratios provide an overview of a firm’s use of debt, amount of debt, and its ability
to meet financial obligations. In addition to these groups of financial ratios, market value ratios
provide an indication “of the company’s risk and future prospects” (Brigham & Houston, 2007,
p. 115). Financial ratios are determined through mathematical calculations using data obtained
from the firm’s financial statements. Interpreting these ratios provides a picture of a company’s
overall performance between accounting periods and assists analysis of the company in relation
to competitors in the industry.
Table 1
Walgreen 2012 Balance Sheet at August 31, 2012 and 2011
(In millions, except shares and per share amounts)
Assets
Current Assets
Cash and cash equivalents
Accounts receivable, net
Inventories
Other current assets
Total Current Assets
Non-Current Assets
Property and equipment, at cost, less accumulated
depreciation and amortization
Equity investment in Alliance Boots
Alliance Boots call option
Goodwill
Other non-current assets
Total Non-Current Assets
Total Assets
Liabilities and Shareholders' Equity
Current Liabilities
2012
$
$
1,297
2,167
7,036
260
10,760
12,038
6,140
866
2,161
1,497
22,702
33,462
2011
$
$
1,556
2,497
8,044
225
12,322
11,526
2,017
1,589
15,132
27,454
WALGREEN COMPREHENSIVE FINANCIAL ANALYSIS
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Assets
Short-term borrowings
Trade accounts payable
Accrued expenses and other liabilities
Income taxes
Total Current Liabilities
Non-Current Liabilities
Long-term debt
Deferred income taxes
Other non-current liabilities
Total Non-Current Liabilities
Commitments and Contingencies
Shareholders' Equity
Preferred stock, $.0625 par value; authorized 32 million
shares; none issued
Common stock, $.078125 par value; authorized 3.2 billion
shares; issued 1,028,180,150 shares in 2012 and
1,025,400,000 shares in 2011
Paid-in capital
Employee stock loan receivable
Retained earnings
Accumulated other comprehensive income
Treasury stock at cost, 84,124,816 shares in 2012 and
136,105,870 shares in 2011
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
2012
$
$
1,319
4,384
3,019
8,722
2011
$
13
4,810
3,075
185
8,083
4,073
545
1,886
6,504
2,396
343
1,785
4,524
-
-
80
936
(19)
20,156
68
80
834
(34)
18,877
16
(2,985)
18,236
33,462
(4,926)
14,847
27,454
$
Table 2
Walgreen 2012 Income Statement at August 31, 2012
(In Millions, except per share and location amounts)
Fiscal Year
Net sales
Cost of sales
Gross Profit
Selling, general and
administrative expenses
Gain on sale of business
2012
$
71,633
51,291
20,342
16,878
-
2011
$
72,184
51,692
20,492
16,561
434
WALGREEN COMPREHENSIVE FINANCIAL ANALYSIS
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Fiscal Year
2012
2011
Operating Income
Interest expense, net
Earnings Before Income Tax
Provision
Income tax provision
Net Earnings
Per Common Share
Net earnings
Basic
Diluted
Dividends declared
Book value
Non-Current Liabilities
Long-term debt
Deferred income taxes
Other non-current liabilities
Assets and Equity
Total Assets
Shareholders' Equity
Return on average shareholders'
equity
Locations
Year-end
3,464
(88)
4,365
(71)
3,376
1,249
2,127
4,294
1,580
2,714
$
$
2.43
2.42
0.95
19.32
$
$
2.97
2.94
0.75
16.69
4,073
545
1,886
$
2,396
343
1,785
33,462
18,236
$
27,454
14,847
12.90%
18.60%
8,385
8,210
Table 3
Walgreen Statement of Cash Flow for the years ended August 31, 2012 and 2011 (In millions)
Cash Flows from Operating Activities
Net earnings
Adjustments to reconcile net earnings to net cash
provided by operating activities Depreciation and amortization
Gain on sale of business
Deferred income taxes
Stock compensation expense
Other
Changes in operating assets and liabilities Accounts receivable, net
2012
$
2011
2,127
$
2,714
1,166
265
99
43
1,086
(434)
132
135
53
394
(243)
WALGREEN COMPREHENSIVE FINANCIAL ANALYSIS
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Cash Flows from Operating Activities
2012
Inventories
Other current assets
Trade accounts payable
Accrued expenses and other liabilities
Income taxes
Other non-current assets and liabilities
Net cash provided by operating activities
Cash Flows from Investing Activities
Additions to property and equipment
Purchases of short-term investments - held to maturity
1,083
(4)
(439)
(184)
(228)
109
4,431
(592)
(24)
384
218
102
112
3,643
(1,550)
-
(1,213)
-
-
-
191
123
(191)
79
(491)
(45)
(4,025)
(63)
(5,860)
(630)
442
(12)
(1,525)
3,000
(1,191)
165
(787)
(17)
(17)
(2,028)
235
(647)
15
1,170
(2,442)
(259)
1,556
1,297
(324)
1,880
1,556
Proceeds from short-term investments - held to maturity
Return of (investment in) restricted cash
Proceeds from sale of assets
Business and intangible asset acquisitions, net of
cash received
(Payments) proceeds from sale of business
Investment in Alliance Boots
Other
Net cash used for investing activities
Cash Flows from Financing Activities
Payments of long-term debt
Issuance of long-term debt
Stock purchases
Proceeds related to employee stock plans
Cash dividends paid
Other
Net cash provided by (used for) financing
activities
Changes in Cash and Cash Equivalents
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
2011
$
$
Calculation and Analysis of 12 Financial Ratios
Table 4
Walgreen Financial Ratios and Calculations Fiscal Year 2012 (In millions)
Ratio Definition
Formula and Calculations
WALGREEN COMPREHENSIVE FINANCIAL ANALYSIS
Ratio Definition
9
Formula and Calculations
1. The Current Ratio is the primary liquidity
ratio. Current assets include cash,
marketable securities, accounts
receivable, and inventories. It indicates
the extent to which current liabilities are
covered by those assets expected to be
converted to cash in the near future.
Current Ratio=Current assets/Current Liabilities
2. The Quick Ratio or Acid Test Ratio is the
second most used liquidity ratio. This
ratio is a measure of the firm’s ability to
pay off short-term obligations without
relying on the sale of inventories.
Inventories are typically the least liquid
of a firm’s assets.
Quick Ratio =Total quick assets/Current
Liabilities
3. The Debt Ratio is used to gain a general
idea as to the amount of leverage being
used by a company. A low percentage
means that the company is less dependent
on leverage, i.e. money borrowed from
and/or owed to others.
Debt Ratio=(Total current liabilities + Total noncurrent liabilities)/Total Assets
4. The Debt-to-Equity Ratio is a measure of
financial leverage. It indicates what
proportion of equity and debt the
company is using to finance its assets. A
high debt/equity ratio generally means
that a company has been aggressive in
financing its growth with debt (Debt to
equity ratio, 2013).
5. Times-Interest-Earned Ratio (TIE Ratio)
measures the extent to which operating
income can decline before the firm is
unable to meet its annual interest costs.
6. Inventory Turnover Ratios are ratios
where sales are divided by some asset,
and they show how many times the item
is “turned over” during the year.
$10,760 Total current assets/$8,722 Total
current liabilities=1.23
All figures from the balance sheet
$3,464 Operating income from income
Statement/$8,722 Total current liabilities from
the balance Sheet=0.40
($8,722 Total current liabilities + $6,504Total
non- current liabilities)/$33,462 Total
assets=0.46
All figures from the balance Sheet
Debt-to-Equity Ratio=Total debt(short-term
borrowings +long-term debt)/Shareholders’
equity
($1,319 short term borrowings + $4,073 long
term debt)/$18,236 Total shareholders’
equity=0.30
All figures from the balance sheet
Times-Interest-Earned Ratio (TIE
Ratio)=EBIT/Interest expense
$3,484 operating income/$108=32.26
All figures from the from income statement
Inventory Turnover Ratio=Net sales/Inventories
$71,633 Net sales from income statement/$7,036
inventories from the balance sheet=10.18
WALGREEN COMPREHENSIVE FINANCIAL ANALYSIS
Ratio Definition
10
Formula and Calculations
7. The Total Assets Turnover Ratio
measures the ability of a company to use
its assets to efficiently generate sales.
The ratio considers all assets, current and
fixed. Those assets include fixed assets,
like plant and equipment, as well as
inventory, accounts receivable, as well as
many other current assets (Peavler, n.d.).
Total Assets Turnover Ratio= Net Sales/Total
assets
8. Return on Sales (ROS) is widely used to
evaluate a company’s operational
efficiency. ROS is also known as a
firm’s “operating profit martin” (ROS,
2013).
Return on Sales (ROS)=Profit Margin on
Sales=Operating Income/Net Sales or
(Expenses-Revenue)/Profit by sales
9. Return on Total Assets (ROA) is the ratio
of net income to total assets measures
after interest and taxes.
10. Return on Total Equity (ROE) is referred
to as the “bottom-line” accounting ratio.
Stockholders expect to earn a return on
their money, and this ratio tells how well
they are doing in an accounting sense
(Brigham & Houston, 2007).
11. Earnings Per Share (EPS) is called the
“bottom line” denoting that of all items
on the income statement EPS is generally
the most important to stockholders.
Earnings and dividends per share are
given at the bottom of the income
statement (Brigham & Houston, 2007).
$71,633 Net sales from income
statement/$33,462 total assets from the balance
sheet =2.14
$3,575 Operating income from income
statement/$71,633 Net sales from the income
statement=5%
Return on Total Assets (ROA)=EAT or Net
earnings/Total assets
$2,127 Net earnings/$33,462 Total assets=6.36%
All figures from the income statement
Return on Total Equity (ROE)=EAT or Net
earnings/Total Shareholder’s equity ending 8-312012
$2,127 Net earnings/18,236 Shareholder’s
equity=11.66%
All figures from the income statement Earnings
Per Share (EPS)=EAT/(Number of shares of
common stock outstanding from
Stockholder’s Equity 2012 period end 8-31-2012
+ number of shares of common stock for the
period end 8-31-2011)/2 to obtain the average.
(Beginning of year + End of year)/2
$2,127 Net earnings from income statement/
average 916,674,732 shares of common
stock=$2.32
(889,294,130 shares of common stock taken
from Stockholder’s Equity statement 8-31-2011
+ 944,055,334 shares from 8-31-2012)/2 =
average 916,674,732. $2,127/916,674,732 =
WALGREEN COMPREHENSIVE FINANCIAL ANALYSIS
Ratio Definition
11
Formula and Calculations
$2.32.
Earnings per diluted share = $2.42 is reported
on the Fiscal Year 2012 report using the average
shares outstanding (diluted)
$2,127,000,000/880,000,000=$2.42 (diluted
EPS)
12. Price/Earnings Ratio (P/E Ratio) shows
how much investors are willing to pay
per dollar of reported profits. P/E ratios
are higher for firms with strong growth
prospects and relatively little risk.
Price/Earnings Ratio (P/E Ratio)= Price per
share/Earnings per share
$35.76/$2.32 Earnings Per share=$15.41
($35.76 price per share taken from yahoo finance
2012.)
Walgreen Trend Analysis
Table 5
Walgreen Trend Analysis Past Three Years
Ratio
Current Ratio
Quick Ratio
Debt Ratio
Debt to Equity Ratio
Times-Interest-Earned Ratio
Inventory Turnover Ratio
Total Assets Turnover Ratio
Return on Sales
Return on Total Assets
Return on Total Equity
Earnings Per Share
Price/Earnings Ratio
2010
2011
2012
1.6
0.58
0.48
0.17
38.90
9.14
2.57
5%
7.96%
14.52%
$2.21
$15.18
1.52
0.40
0.46
0.16
49.25
8.97
2.63
6%
9.89%
18.28%
$2.33
$15.11
1.23
0.40
0.46
0.30
32.26
10.18
2.14
5%
6.36%
11.66%
$2.32
$15.41
Sales in fiscal year 2012 total $71.6 billion as compared with $72.2 billion in 2011 and
$67,520 billion in 2010. Walgreen’s operating profit margin improved from 2010 to 2011 but
WALGREEN COMPREHENSIVE FINANCIAL ANALYSIS
12
then deteriorated significantly from 2011 to 2012. The liquidity ratio includes the current ratio,
which declined in 2012 to 1.23 from 1.52 in 2011 and 1.6 in 2010. This ratio measures the
ability of the company’s assets to cover its liabilities. This would be consistent with the drop in
sales or assets as compared to 2011 to cover their liabilities and the increase in liabilities in 2012
from $8,083 in 2011 and $7,433 in 2010. The drop in sales is attributed to the loss of the firm
entering into an agreement with Express Scripts resulting in decreased prescription sales. In the
fourth-quarter of fiscal year 2012, profits decreased greater than fifty percent. Walgreen states
that this was further compounded by a decrease in consumer spending. In addition, on August 2,
2012, Walgreen invested in Alliance Boots GmbH which cost $90 million pre-tax. “Costs
included $69 million in selling, general and administrative expenses and $21 million of interest
expense” (Walgreen co. form 10-K, 2012, p .40). These increases in costs were also due to
“higher occupancy expenses and drugstore.com expenses” (Walgreen co. form 10-K, 2012, p.
44). The quick ratio remained the same in 2011 and 2012 but declined as compared to 2010.
This would indicate that Walgreen did not rely on the sale of inventories during this fiscal year
even though their operating income declined. Inventories declined and were $7,036 in 2012
compared to $8,044 in 2011. The current liabilities increased in 2012 to $8,722 (millions) from
$8,083 in 2011 and $7,433 in 2010. The cash and cash equivalents, short-term investments and
net accounts receivable declined in 2012 to $3,464 from $4,053 in 2011 and $4,330 in 2010.
The debt management ratios included the debt ratio which stayed the same in 2011 and
2012 at .46 and dropped compared to .48 in 2010. A low percentage is preferred indicating that
the company is less dependent on leverage or borrowing money in order to sustain their business.
The long-term debt was significantly higher in 2012 $4,073 as compared to $2,396 in 2011 and
$2,389 in 2010. This ratio would be offset by the shareholders’ equity that increased in 2012 to
WALGREEN COMPREHENSIVE FINANCIAL ANALYSIS
13
$18,236 from $24,847 in 2011 and $14,400 in 2010. Therefore, the lower debt ratio in 2011 and
2012 is positive compared to 2010. The debt-to-equity ratio is another measure of financial
leverage that is preferred to be low to show that that the company does not rely on growth
through borrowing and debt. This ratio was significantly higher in 2012 at .30 compared to .16
in 2011 and .17 in 2010. This is due to the increase in short-term borrowings of $1,310.0 in
2012 compared to $5.0 in 2011 and 2010. Even though the shareholders’ equity increased in
2012 as noted above the ratio was affected by the significant increase in short term borrowings.
This means that Walgreen was financing its growth with debt.
The Times-interest-earned ratio, or TIE ratio, was significantly lower in 2012 as
compared to 2011 and 2010. A higher value of times ratio is favorable showing Walgreen’s
ability to repay its interest and debt. The interest expense was higher in 2012 at $108 compared
to $89 in 2011 and 2010. In fiscal 2012, Walgreen incurred $21 million in interest expense on
the bridge term loan facility in conjunction with the investment in Alliance Boots GmbH
(Walgreen co. form 10-K, 2012). “A ratio of 1.0 means that income before interest and tax of
the business is just enough to pay off its interest expense” (Times interest earned ratio). This
ratio is important to creditors. A creditor would lend to a company with the highest times
interest earned ratio. The 2012 annual report points out that Walgreen is concerned about
incurring additional debt by the agreement entered into with Alliance Boots. Its creditors will
monitor Walgreen if the trend continues to decline. As of October 19, 2012, Moody has rated the
Long-Term Debt as Baaa1 with a negative outlook. Standard and Poor’s rated their long-term
debt as BBB with a stable outlook. These ratings impact Walgreen’s borrowing costs, access to
capital markets and operating lease costs (Walgreen co. form 10-K, 2012).
WALGREEN COMPREHENSIVE FINANCIAL ANALYSIS
14
The asset management ratios include the inventory turnover ratio, which rose to 10.18 in
2012 compared to 9.14 in 2010, and 8.97 in 2011. This ratio was unfavorable from 2010 to 2011
but then improved from 2011 to 2012 exceeding 2010 levels. This ratio measures the number of
times an item is turned over in a year. During fiscal 2012, Walgreen added $1.6 billion to
property and equipment which included new stores and information technology. The total asset
turnover ratio considers all assets, current and fixed such as plant and equipment as well as
inventory and accounts receivable. This ratio declined in 2012 at 2.14 compared to 2.63 in 2011
and 2.57 in 2010. Sales declined in 2012 but the total assets increased. The company acquired
Alliance Boots at the end of the fiscal year and did not have the ability to generate sales to offset
the investment due to the timing.
The profitability ratios all declined in 2012 compared to 2011 due to the return on sales
which dropped one percent in 2012 from 2011. This ratio is used to evaluate a company’s
operational efficiency and helps management in determining how much profit is being produced
per dollar of sales. If this ratio trend declines, it could indicate that company is in trouble. Sales
declined -0.8% $71.6 compared to 2011 at $72.2. Operating income decreased in 2012 from
$3,575 to $4,103 in 2011 and $3,626 in 2010. This ratio would reflect the impact of the loss of
Express Scripts with decreased prescription sales. Return on Total Assets (ROA) is the ratio of
net income to total assets measures after interest and taxes. This ratio looks at how efficient
management is in using its assets or allocating its resources to generate earnings (Investopedia,
n.d.). This ratio is consistent with showing a decline in 2012 as compared to 2011 but had
improved from 2010 to 2011. These ratios are consistent with the decline in net earnings and
total assets for the same period. The Return on Equity ratio improved from 2010 to 2011 but
then declined significantly from 2011 to 2012. These ratios aligned with the decrease in net
WALGREEN COMPREHENSIVE FINANCIAL ANALYSIS
15
earnings in 2012 and impacted this ratio to be lower even though the shareholders’ equity had
increased in 2012. The shareholders’ equity (in millions) increased significantly in 2012 at
$18,236 as compared to $24,847 in 2011 and $14,400 in 2010.
The Market Value Ratio EPS, earnings per share, is an indicator of a company’s
profitability and a “favorite of financial analysts” (Hawawini & Viallet, 2011, p. 158). This ratio
is very important to stockholders. There is variability in calculating this ratio. As calculated on
the 2012 annual report, the average shares outstanding used in the EPS calculation are
880,000,000 diluted resulting in a diluted EPS of $2.42. “A diluted EPS expands on the basic
EPS by including the shares of convertibles or warrants outstanding in the outstanding shares
number” (Investopedia, n.d.). As the EAT, earnings after taxes, is a period of time measure, the
calculation should include the average number of shares of common stock outstanding from the
(beginning of the year + the end of the year) / two. The result of this calculation would be more
accurate with a result of $2.32. Some companies use the number of stock at the end of the period
to simplify the calculation. The EPS in 2012 declined slightly from $2.33 in 2011 to $2.32 in
2012 but had improved from $2.12 in 2010. A high P/E ratio is a measure of projected future
growth. A company with a low price per earnings ratio is considered risky to invest in and has
poor growth potential. The price per earnings ratio in 2012 was $15.41 as compared to $15.11 in
2011 and $15.18 in 2010. The stock price was $35.76 in 2012 compared to $35.21 in 2011.
Peer-Group Analysis
Table 6
Peer-Group Analysis for Walgreen, CVS, and Rite Aid, 2012
Ratio
Current Ratio
Quick Ratio
Walgreen
CVS
Rite Aid
1.23
0.40
1.44
0.57
1.71
0.49
WALGREEN COMPREHENSIVE FINANCIAL ANALYSIS
Ratio
Debt Ratio
Debt to Equity Ratio
Times-Interest-Earned
Ratio
Inventory Turnover Ratio
Total Assets Turnover
Ratio
Return on Sales
Return on Total Assets
Return on Total Equity
Earnings Per Share
Price/Earnings Ratio
16
Walgreen
CVS
Rite Aid
0.46
0.30
32.26
0.43
0.26
12.16
1.35
-2.45
1.01
10.18
2.14
11.44
1.87
8.04
3.59
5%
6.36%
11.66%
$2.32
$15.41
3.15%
5.88%
10.28%
$3.27
$15.96
4.45%
6.21%
0
$0.12
$11.63
Peer Group Analysis Narrative
Both CVS and Rite Aid identify as the direct competitors for Walgreens as evidenced by
market presence and strategies as well as product overlap. Considered by most measures to be
the second largest drugstore retail chain the in the United States, CVS demonstrates a consistent
financial performance with a 14.2% increase in operating profit from fiscal year 2011 to 2012
(CVS Caremark Annual Report 2012, p. 51). Rite Aid is the third largest retail drugstore chain
in the United States in both revenues and number of stores. “Rite Aid's stock trades with a
market-cap around $1.1 billion, compared to major peers Walgreen ($35 billion) and CVS ($60
billion) that trade much higher. Both Walgreen and CVS also have solid cash positions, $1.8
billion and $1.2 billion, respectively (Hardgrave, 2012, p. 1).
Similar to Walgreens, both CVS and Walgreens operate a segmented business model by
selling prescription drugs as well as other retail merchandise. CVS posted 68.8% of the most
recent fiscal year’s net revenue from its pharmacy business with the rest from the other retail
business (p. 32). At Rite Aid for fiscal year 2013, prescription drug sales accounted for 67.6% of
WALGREEN COMPREHENSIVE FINANCIAL ANALYSIS
17
the total sales and the remaining 32.4% was “front-end” products (Rite Aid Corporation Form
10-K 2013, p. 3). Rite Aid believes that pharmacy operations will continue to represent a
significant part of their business due to favorable industry trends, an aging population, increased
life expectancy, anticipated growth in Medicare Part D prescription coverage and the expanded
coverage of uninsured Americans as a result of the Affordable Care Act (Rite Aid Corporation
Form 10-K. 2013, p. 3). Strategies at CVS have paralleled this, however management notes
challenges in the continued margins in this area due to conversion of many former named drugs
to generic as well as to unpredictable impacts from managed care such as multi-sourced drug
pricing.
The primary strategic goal for fiscal year 2014 is to continue transformation of Rite Aid
into a neighborhood destination for health and wellness. The primary financial goal for fiscal
year 2014 is to continue to expand the EBITDA margins. According to the Rite Aid Form 10-K
2013, there are factors that will affect their future financial prospects, “current economic
conditions, substantial indebtedness, variable interest rates, stockholders will experience dilution
if additional common stock is issued and the ability of the Jean Coutu Group’s right to sell
common stock at any time” (pp. 11-13).
Analysis of the peer group reveals that the current ratio of Rite Aid is higher than CVS
and Walgreen for 2012. “The larger the current ratio, the more liquid the firm, meaning it should
be easier for Rite Aid to repay their short term liabilities with the cash raised from the sale of
their short term assets. The current ratio should be at more than one and closer to two”
(Hawawini and Viallet, 2011 p. 85). All three drug stores have a current ratio above one and
Rite Aid had more has the highest current ratio at 1.71, indicating that the current assets are
greater than liabilities. As noted in Table 6, CVS has the greatest quick ratio, which is a liquidity
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18
ratio indicating the amount of cash and accounts receivable related to liabilities. Based on this,
one may infer that CVS has a greater amount of cash. At the end of their last fiscal year,
reported $1,375,000,000 in cash and cash equivalents compared to Rite Aid’s $129,450,000.
As of March 2, 2013, Rite Aid had $6.0 billion of outstanding indebtedness and
stockholders’ deficits of $2.5 billion. Their earnings were insufficient to cover fixed charges and
preferred stock dividends for fiscal 2013 by $140 million. Rite Aid has a higher debt ratio and a
negative debt to equity ratio related to their extreme indebtedness compared to Walgreen and
CVS. By contrast, CVS demonstrated $28.2 billion in current liabilities and $37.7 billion in
shareholder’s equity that included $25 billion in retained earnings, balanced to assets of $65.9
billion.
The comparison of profitability ratios indicates variability between all three companies.
Fiscal year 2013 was the first year that Rite Aid showed improvement of their net income at
$118.1 million compared to ($368.57) million in fiscal year 2012. In keeping with the preceding
years of financial loss, only Walgreens and CVS have demonstrated substantial earnings per
share (EPS) and return on total equity as well. Each of these ratio sets and groups of key
measures support the rankings assigned to these three peers in the retail pharmacy and drugstore
chain.
Analytical Report of Walgreen’s 2012 Financial Performance
Fiscal year 2012 was a challenging year for Walgreen. “While we controlled costs and
generated strong cash flow in the fourth quarter, our performance also reflected a strategic shift
in promotional spending, a continued economically challenged consumer, and the impact from
Express Scripts, said Walgreens President and CEO Greg Wasson” (Walgreen co. reports fiscal
2012 fourth quarter and full year results, 2012). Express scripts are a pharmacy provider
WALGREEN COMPREHENSIVE FINANCIAL ANALYSIS
19
network consisting of six million customers, whose contract was not entered into with Walgreen
in Fiscal Year 2012. This breakdown in contract negotiations caused a negative result on the
cost per diluted share for the fiscal year to drop six cents to $2.42. According to Cahill (2012),
this was the “worst corporate blunder of the year” (para. 5). Prescription sales dropped 8.1% in
the fourth quarter of 2012 a decrease of 6.9% over the same quarter in 2011. Walgreen’s 2012
annual report indicates that comparable stores declined 12.8 percent during this same period.
Walgreen had increased expenses in selling, general and administrative costs due to the
investment in Alliance Boots. “During the fiscal 2012, the company returned more than $1.9
billion to shareholders through dividends and share repurchases. This was consistent with the
company’s goal of returning cash to shareholders, and Walgreens has now increased its dividend
for thirty seven consecutive years” (Walgreen co. reports fiscal 2012 fourth quarter and full year
results, 2012). The combination of reduced profits from prescription sales, decreased consumer
spending, and increased expenses of the Alliance Boots investment resulted in a decline in
Walgreen’s 2012 financial performance as corroborated in the three-year trend analysis review.
Analysis of Walgreen’s Strategies in 2012 and 2013
The most pronounced missed opportunity for Walgreen in 2012 was not entering into an
agreement with Express Scripts Inc., a leading pharmacy provider, resulting in a significant
decline in prescriptions, sales, and lost customers. This decision affected the decrease in
financial ratios in 2012 from 2011. Walgreen reentered into the Express Scripts agreement along
with adding other pharmacy providers. Walgreen launched a marketing campaign to recover lost
customers that migrated to its competitors. “Fiscal Year 2013 launched a groundbreaking
customer loyalty program called Balance Rewards that offers easy enrollment, instant points and
endless rewards. It even rewards customers for healthy behavior such as getting flu shots and
WALGREEN COMPREHENSIVE FINANCIAL ANALYSIS
20
exercise. Balance rewards will take our Well Experience to a new level” (2012 Walgreens
Annual Report, p. 3). Walgreen also purchased a drugstore chain, USA Drug. Should Walgreen
consider purchasing Rite Aid? Walgreen should consider an analysis of a merger with Rite Aid.
Rite Aid is considered a “wild card” in the competitor arena by Susan Aluise (2012).
Three future goals for Walgreen are to execute the partnership with Alliance Boots,
expand its Well Experience stores and concepts throughout Walgreen, and advance the role that
community pharmacy can play in healthcare across the communities that they serve (2012
Walgreens Annual Report, p. 5).
“Walgreens became the first national pharmacy chain to be approved by the Centers of
Medicare Services to participate in ACO’s, accountable care organizations in February 2013.”
(Punke, 2013) Walgreen has partnered with three Medicare ACO’s in New Jersey, Florida and
Texas. This strategy is regarded as a natural move into wellness enhancing their health model
service line. Since the Medicare population is increasing, Walgreen will benefit by capitalizing
on this segment of customers resulting in increased market share. Walgreen needs to
demonstrate “that they can serve 5,000 beneficiaries” (Punke, 2013). Walgreen certainly would
have a vested interest in reaching and exceeding that threshold. They believe that they are the
community link to acute care hospitals by providing health services from nurse practitioners and
pharmacists in their drugstores.
Recommendation for Walgreen’s Global Business Strategies in the Next Three Years
In the fourth quarter of 2012 Walgreen entered into a global strategic partnership with
Alliance Boots, a Swiss based company, which offers global health and beauty brands. This
agreement will create strength and growth in the international market for both companies.
“Global spending on medicine is expected to soar in the coming decade, with most of the growth
WALGREEN COMPREHENSIVE FINANCIAL ANALYSIS
21
coming in the emerging markets that Walgreen is targeting for expansion” (Japsen, 2012, p. 38).
According to Japsen (2012), Obamacare is a challenge due to the ongoing implementation of
government control to “capitalize on emerging markets”(p. 38). Therefore, Walgreen’s strategy
to invest in Alliance Boots was a smart move to obtain global positioning in the market while
responding to the government economic threat. With projections of global spending on medicine
increasing, and increased government restrictions, Walgreen should focus its strategies on
ensuring the success of its investment in Alliance Boots. Walgreen should seek additional
expansion opportunities in the global market to develop and grow its business. The global entry
puts Walgreen ahead of its competitor CVS which is primarily based in the United States. “The
Walgreens-Alliance Boots partnership will accelerate our strategy to transform the traditional
drugstore. Walgreens now has interests in businesses in Europe and across the globe (2012
Walgreens Annual Report, p. 4) and would become a world leader should they acquire the
remaining 55% of Alliance Boots.
Conclusion
The overall financial wellness of Walgreen was outlined in the 2012 financial analysis,
Table Four presents financial ratios, Table Five demonstrates the past three-year trend analysis,
and Table Six illustrates a peer comparison analysis. Fiscal year 2012 was unfavorable as
compared to 2011 primarily due to the disengagement with Express Scripts., decreased consumer
spending, and entering into a major investment with Alliance Boots at the end of the fiscal year.
The trend analysis also supports the effects of these influences in the decreased performance of
Walgreen from 2011 to 2012 in all of the key ratios. The peer analysis showed that Walgreen
continues to be a leader, but its strategic decisions in 2012 impacted its competitors favorably.
Walgreen at the “corner of happy and healthy” is accomplishing its goal of providing “happy
WALGREEN COMPREHENSIVE FINANCIAL ANALYSIS
22
savings and healthy incentives in perfect balance” (2012 Walgreens Annual Report) through its
savings and rewards programs, technology, and expansion into the global market. Walgreen is
also providing its investors with healthy and happy returns by returning cash to its shareholders
and increasing dividends and as evidenced through the 2012 Annual Report Analysis. Even
though the sales declined in 2012, the future is optimistic with their new strategies of global
expansion, renewing their agreement with Express Scripts, and their innovative link to healthcare
through ACO’s, Walgreen will be financially viable and positioned well into the future.
WALGREEN COMPREHENSIVE FINANCIAL ANALYSIS
22
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