Akrati
Johari
(akratij
ohari@
gmail.c
om)
WALGREENS
Andy Guar, Akrati Johari, Mike Lavin, Yanyan Xu, Yili Xu
Presented on 10/22/2009
2
Deliverable Outline
I.
II.
III.
IV.
V.
VI.
VII.
VIII.
Company Overview (Andy)
Company Strategy (Akrati)
Macro-economic Outlook (Eric/Mike)
Industry Analysis (Eric/Mike)
Competitors (Eric/Mike)
Valuation (Yanyan/Andy)
Client Portfolio (Andy)
Recommendation
History
3




Founded in 1901 by Charles R Walgreen Sr..
Rose to 5 stores by 1915
By the mid 1920s, there were about 65 stores with
an annual sale of 1.2 million dollars.
In 1927, the company went public and by the end of
1929, there were 397 Walgreen stores in 87 cities;
annual sales were $47 million with net earnings of $4
million
4
History (continued)
In the 1950s, Walgreens began to build self-service instead of clerk service stores
in the Midwest and became the largest self-service retailer in the country by 1953

In the early 1980s, the company pioneered computerized pharmacies connected by
satellite

In 1991, Walgreens completed the installation of point-of-sale scanning to speed
checkouts


In 1992, the company became the first drugstore with a drive-thru pharmacy
Walgreens.com is launched in 1999, a comprehensive online pharmacy offering
customers a convenient and secure way to take care of my pharmaceutical and
healthcare needs online


1000th Store in 1984 and 2000th store in 1994, 5000th in 2005, 7000th in 2009.
Present
5
Presently runs stores in all 50 states with about 200,000 Employees
Walgreens is named to Fortune magazine’s Most Admired Companies in
America list for the 15th consecutive year

Ranked 40th on the Fortune 500 list of the largest U.S.-based companies

In 2008, Walgreens acquired McKesson Corporation’s specialty pharmacy,
I-trax, Inc
In 2009 announced acquisition of New Jersey's Drug Fair chain,
Walgreens's expansion differs from that of its competitors,
CVS/pharmacy and Rite Aid, in that Walgreens usually expands by
opening new stores in new markets instead of by acquisitions though.

6
Management
Gregory Wasson- President and CEO
•
On January 26, 2009, was named CEO effective February 1, 2009
•
Internal hire, with the company since 1980
Alan McNally- Chairman
•
Replaced Jeff Rein as Chairman and Acting CEO after his retirement on
October 10, 2008
•
Served on Walgreens board of directors since 1999
Jeff Rein- Former Chairman and CEO
•
Served as CEO from 2006 until October 10, 2008
•
Speculation that his retirement was forced by the board of directors
•
Conflict over future growth of the company
7
Business Strategy
Source: https://materials.proxyvote.com/Approved/931422/20081121/AR_28708/HTML2/walgreens-ar2008_0040.htm
(Accessed Oct 8, 2009)
Business Strategy (continued)
8

Focus on serving its customers better




Low-cost alternatives and the best overall value
Eg: Prescription Savings Club
Improve customers’ experience
Adjusted our organic store growth

Slower growth offers two big positives:
 More time to develop our management ranks and focus on improving
the customer experience
 Greater flexibility to invest in opportunities
9
Business Model
Source: https://materials.proxyvote.com/Approved/931422/20081121/AR_28708/HTML2/walgreens-ar2008_0040.htm
(Accessed Oct 8, 2009)
10



Store Model
2009 business model Walgreens locations are always set up as a
freestanding locations
Must be at the corners of busy, intersecting streets on the prevailing
side of the street with the most traffic flow
Location allows the store to offer additional conveniences to
customers such as a drive-through pharmacy and 24-hour shopping
Source: http://en.wikipedia.org/wiki/Walgreens (Accessed Oct 10, 2009)
11
Business Locations
Source: https://materials.proxyvote.com/Approved/931422/20081121/AR_28708/HTML2/walgreens-ar2008_0040.htm
(Accessed Oct 8, 2009)
12
Business Locations (continued)
New store openings:
June ’09 - Walgreen Co. announced the opening of the first drugstore nationwide to
meet top environmental requirements for efficiency and design.
July ’09 – Walgreen Co. to open store in Alaska on July 12, 2009. The Wasilla store,
along with two Anchorage locations that will open in August, includes products from
local vendors, including coffee and moose nuggets to ulus and fishing supplies.
August ’09 - Walgreen Co. will celebrate the grand opening of the first drugstore in
Illinois to meet top environmental requirements for efficiency and design.
13
Business Locations (continued)
Acquisitions and JV:
Feb ‘09 - Walgreens signed an agreement to purchase 12 Rite Aid locations,
including seven in San Francisco and five in eastern Idaho
Aug ‘09 - Walgreen Co. has entered into a joint venture with Vanderbilt
Medical Center. The joint venture will operate under the name Vanderbilt
Home Care, affiliated with Walgreens Infusion and Respiratory Services, and
will be located in Brentwood, Tenn
14
Macro-economic Outlook
I.
II.
III.
The current economic climate continues to put strain on
credit markets, forcing companies and consumers to hold
onto their cash.
Robeco’s Macroeconomic Outlook Report predicts that
2009 will be characterized by an economic recession
that is longer and deeper than any that have occurred
for a quarter of a century.
In spite of the economic crisis and continued expansion,
Walgreens reduced the growth in expenses by 6% in
fiscal 2008. This signifies increased efficiency.
15
Industry Analysis
I.
In recent years the drug retail sector has
been growing at a fluctuating rate.
I.
II.
CAGR for 2004-2008 = 5% and is expected to increase to
5.8% for five year period 2008-2013.
The retail drug sector, valued at $1.5 billion
in 2008, is expected to reach $2 billion by
the end of 2013.
http://globalbb.onesource.com/web/Reports/ReportMainIndustry.aspx?SicCodeID=220585&Process=CP&Report=INDUSTRYSU
MMARY( Accessed September 30, 2009)
16
SWOT Analysis/Porter’s Five Forces
Highly competitive industry driven by number of
players, low switching costs, and
undifferentiated products. Drugs are thought of
as commodities.
 INTENSE RIVALRY
High industry attractiveness
and low barriers to entry.
 STRONG THREAT
New
Entrants
Buyer
Power
Rivalry
Supplier
Power
Large number of buyers weakens buyer power, but
negligible switching costs strengthens it.
 MODERATE THREAT
Substitutes
Supermarkets and generics
are large threats.
 Strong Threat to branded
drugs
The large retailers purchase directly from several
suppliers, and often carry their own brands as well.
This puts pressure on suppliers. Careful of over
reliance.
 MODERATE THREAT
http://globalbb.onesource.com/web/Reports/ReportMainIndustry.aspx?SicCodeID=220585&Process=CP&Report=INDUSTRYSU
MMARY( Accessed September 30, 2009)
17
Competitors- Comparative Descriptions
Walgreen is one of the largest drugstore chains in the US, in terms of sales. The drugstores
are engaged in the sale of prescription drugs (65%), non-prescription drugs (10%), and
general merchandise (25%).
CVS Caremark's operations are grouped into two business segments: retail pharmacy and
pharmacy services. The retail pharmacy business segment comprises retail drugstores, an
online retail website, CVS.com, and retail healthcare clinics. The retail drugstores operate
under the label, 'CVS Pharmacy'. CVS Caremark also operates MinuteClinic, a store-based
clinic.
Rite Aid has an alliance with GNC to co-market a line of vitamins and nutritional
supplements called PharmAssure that are sold in Rite Aid and GNC stores. It offers
approximately 3,000 products under the Rite Aid private brand. In June 2007, the
company completed its acquisition of 1,854 Brooks and Eckerd stores and six distribution
centers from The Jean Coutu Group (PJC). Rite Aid also fills prescriptions for state
sponsored Medicaid and Medicare programs.
http://globalbb.onesource.com/web/Reports/ReportMainIndustry.aspx?SicCodeID=220585&Process=CP&Report=INDUSTRYSU
MMARY( Accessed September 30, 2009)
Competitors- Comparative Ratios
18
20042008
Profit
Margin
Total
Asset
Turnover
Equity
Return on
Multiplier Equity
Current ROE Current ROA
Walgreen 3.70%
2.76
1.70
17.36%
14.73%
8.54%
CVS
3.40%
1.66
1.82
10.27%
9.85%
6.70%
Rite Aid
0.66%
2.44
7.23
11.64%
Negative
0.92%
Walgreens had September sales of $5.35 billion, an increase of 10.3% from $4.85 billion for the
same month in 2008. Sales in comparable stores (those open at least a year) increased 5.3%, while
comparable store front-end sales increased 2.0%.
September pharmacy sales increased 11.2%, while comparable pharmacy sales increased 7.0%.
Positively impacted by flu shots and negatively impacted by generics.
http://finance.yahoo.com/q?s=wag(Accessed October 8, 2009)
Assumptions – Business Mix
19
Fundamental shift in business mix towards prescription drugs
Assumptions – Store Sales
20
Management estimates coupled with focus on same store growth and remodeling
WACC
21
Beta
Yahoo
Bloomberg
Google
Risk free rate
Risk Premium
Stock Price
Cost of Equity
Market Value of Equity
Cost of Debt
Tax Rate
Market Value of Debt
Enterprise Value
Growth Rate
Cost of equity
CAPM
Cost of equity
8.27%
ROE
Cost of equity
16.72%
Goal Post
Cost of equity
12.50%
0.81
0.85
0.9
0.77
3%
6%
$40.37
8.27%
40,018.8
4.71%
36.60%
2,351.0
$42,369.78
3.00%
Sum of Present Value's
Less Debt
Intrinsic Value
# Shares Outstanding
Intrinsic Value per share
-/+ 10%
WACC (Goal Post)
Debt/TV
5.5%
Equity/TV
94.5%
Wacc
11.97%
WACC (ROE)
Debt/TV
5.5%
Equity/TV
94.5%
Wacc
15.96%
WACC (CAPM)
Debt/TV
5.5%
Equity/TV
94.5%
Wacc
7.98%
Goal Post
Sum of Present Value's
Less Debt
Intrinsic Value
# Shares Outstanding
Intrinsic Value per share
-/+ 10%
CAPM
48,482
2,351
46,131
991
$46.54
$41.88 /
$51.19
Sum of Present Value's
Less Debt
Intrinsic Value
# Shares Outstanding
Intrinsic Value per share
-/+ 10%
25,151
2,351
22,800
991
$23.00
$20.70 / $25.30
ROE
16,339
2,351
13,988
991
$14.11
$12.70 / $15.52
Focus on Goal Post, which uses an average cost of equity from CAPM and ROE
Goal Post
22
Intrinsic Value
1
2008
163
146
Free Cash Flows
Present Value (Goal Post)
2
2009
1,382
1,102
3
2010
1,888
1,345
4
2011
2,453
1,561
5
2012
2,750
1,562
Goal Post
Sum of Present Value's
Less Debt
Intrinsic Value
# Shares Outstanding
Intrinsic Value per share
-/+ 10%
25,151
2,351
22,800
991
$23.00
$20.70 / $25.30
Appears low compared to current price of ~$40, look at operating leases!
6
2013
3,070
1,557
TV
35,238
17,879
WACC – Contractual Obligations
23
Beta
Yahoo
Bloomberg
Google
Risk free rate
Risk Premium
Stock Price
Cost of Equity
Market Value of Equity
Cost of Debt
Tax Rate
Market Value of Debt
Enterprise Value
Growth Rate
Cost of equity
CAPM
Cost of equity
8.27%
ROE
Cost of equity
16.72%
Goal Post
Cost of equity
12.50%
0.81
0.85
0.9
0.77
3%
6%
$40.37
8.27%
40,018.8
4.71%
36.60%
2,351.0
$42,369.78
3.00%
Sum of Present Value's
Less Debt
Intrinsic Value
# Shares Outstanding
Intrinsic Value per share
-/+ 10%
WACC (Goal Post)
WACC (CAPM)
WACC (ROE)
Debt/TV
33.2% Debt/TV
36.8% Debt/TV
30.1%
Equity/TV
66.8% Equity/TV
63.2% Equity/TV
69.9%
Wacc
9.36% Wacc
6.36% Wacc
12.62%
Sum of Present Value's
Less Debt
Intrinsic Value
# Shares Outstanding
Intrinsic Value per share
-/+ 10%
CAPM
78,736
2,351
76,385
991
$77.06
$69.35 /
$84.76
Goal Post
40,518
2,351
38,167
991
$38.50
$34.65 / $42.35
Sum of Present Value's
Less Debt
Intrinsic Value
# Shares Outstanding
Intrinsic Value per share
-/+ 10%
Focus on Goal Post, which uses an average cost of equity from CAPM and ROE
ROE
26,154
2,351
23,803
991
$24.01
$21.61 /
$26.41
Goal Post – Contractual Obligations
24
Cap Structure
Debt
2,351.0
PV of Obligations
17,583.3
Equity
40,018.8
Total debt + equity
59,953.0
Goal Post
40,518
2,351
38,167
991
$38.50
$34.65 / $42.35
Sum of Present Value's
Less Debt
Intrinsic Value
# Shares Outstanding
Intrinsic Value per share
-/+ 10%
Intrinsic Value
0
1
2008
2009
163
1,382
163
1,263
Free Cash Flows
Present Value (Goal Post)
2
2010
1,888
1,578
3
2011
2,453
1,876
Payments due by period
Less than
Operating leases
1 year
1,811
Over 5
1-3 years
3-5 years
3,849
3,763
years
23,615
Total
33,038
Operating leases significantly change the intrinsic value
4
2012
2,750
1,922
5
2013
3,070
1,962
TV
49,679
31,753
Multiples Valuation
26
Multiples Valuation
Multiple
P/E (ttm):
P/E (Forward):
P/S (ttm):
P/B (mrq):
TEV/EBITDA
Computed Price
32.94
22.76
25.13
25.32
35.95
Range : $ 25 - 35
27
Client Portfolio
I.
II.
III.
IV.
V.
Stock Performance Graph
Stock Ownership Profile
Transaction History
RCMP Portfolio Correlation
RCMP Portfolio Weights
28
1 Year Stock Price
http://www.google.com/finance?q=wag (Accessed October 20, 2009)
29
5 Year Stock Price
http://www.google.com/finance?q=wag (Accessed October 20, 2009)
30
Ownership
% of Total Shares Outstanding
30.11%
0.48%
4.70%
Institutions
64.71%
Hedge Fund Managers
Insiders
Public and Other
31
RCMP Current portfolio
WAG, 5.9%
MCD, 3.5%
SRCL, 1.5%
WFR, 2.8%
% of Holding
Cash, 57.4%
KMB, 7.1%
JKHY, 2.9%
FR, 1.5%
DO, 1.6%
AEO, 14.3%
AEE, 1.5%
Cash
AEE
AEO
DO
FR
JKHY
KMB
MCD
SRCL
WAG
WFR
32
Transaction history & RCMP Correlation
Company
WAG
AEE
0.32
AEO
0.29
•September 20th, 2006
Sold 500 shares at $49.94 /share
Realized gain of $12,470
CPRT
0.07
DO
0.14
FR
0.33
•Current Position
Own 500 shares
Current unrealized profit $ 7477.50
JKHY
0.13
KMB
0.32
SRCL
0.08
WFR
0.14
•October 6th, 1999, entered position
1000 shares at $25.00 per share
33
Recommendation
I.
II.
III.
Hold 500 shares @ $39.64
Intrinsic value range @ $34-42
Strong management
I.
Focused on same store growth
II.
Concentrating on generic drugs with higher profit margin
III.
Customer Centric Pharmacy Wellness Program