WALGREEN CO.
Matt Byford
Brandon Honey
Shivam Khanna
Joe Vaccaro
October 28, 2008
Agenda
► Company
Overview
► Macroeconomic Overview
► Industry Overview
► Recent Developments
► Forecasting/Expectations
► Valuation of Walgreens
► Recommendation
Company Overview
► Founded
in 1901 by Charles Walgreen
 1st store was in Chicago
► 226,000
employees as of 8/31/2007
► Goal is to have 7,000 stores open by 2009
Company Overview
►
Walgreen company operates retail drug store chains that are
engaged in the retail sale of prescription drugs, non-prescription
drugs, and general merchandise.
►
In 2008, it opened 561 net new stores for a total of 6443
Walgreens in 49 states, District of Columbia, and in Puerto Rico.
►
It is the fastest growing retailer in the US, and is the 2nd largest
drugstore chain behind CVS.
►
Ranked 44th on the Fortune 500 list of the largest US-based
companies.
►
On the list of Fortune’s magazine’s Most Admired Companies in
America for the last 14 consecutive years.
Company Overview
► A.G.
McNally
 Chairman of the Board since 2008
 Chief Executive Officer since 2008
 Board member sine 1999
► Gregory
Wasson
 President and Chief Operating Officer since 2007
► Jeff
Rein retired in October 2008
 Chairman and Chief Executive officer since 2003
► William
Rudolphsen
 Senior Vice President and Chief Financial Officer since
2004, new role as Chief Risk Officer
► Has
been with Walgreens since 1977
Macroeconomic Overview
Decline in Consumer Confidence
Consumer Confidence Index (CCI)
120
100
80
60
40
20
CCI hit all time low in June 2008 (51)
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Macroeconomic Overview
►
►
Oil continues to be volatile, but lower prices will have positive impact on economy
Cost to do business will be lower
Strategy
►
Organic store growth
► Relocate,
►
remodel
Densely-populated areas like Southern California and Northeast
Invest heavily in high-tech store and distribution systems which
drive service up and costs down
► Acquisitions where there are synergies
► Healthcare offerings beyond that of a traditional pharmacy
►
 Offer an online drugstore web site totally integrated with retail stores
 Take Care Healthcare Systems
Increase market share in front-end of stores
► Must continue to find ways to leverage the benefits of scale without
losing the ability to react quickly to changes in customer needs
►
Strategy
► Growth
 Walgreens is currently increasing their net
stores operated by approximately 1 store every
16 hours
 The company, which currently operates 6,443
stores, plans to operate at least 7,000 stores by
2009
►See
room for organic growth to 13,000 stores
Innovations
► Introduced
freestanding stores in early 1990s with
drive thru pharmacies
►Today,
more than 80% of Walgreen Co.’s stores have
drive thru pharmacies
► Nation-wide
1 hour photo service
►Available
► Touch
► 50%
at more than 98% of stores
tone prescription refills
of people live within 2 miles of a
Walgreens
Drug Store Industry
►
Highly Competitive Industry
 Competition with other drugstore chains, independent drugstores,
mail order prescription providers, internet pharmacies
 Other competitors include various grocery stores, mass merchants,
and dollar stores
►
Main competitors:
 CVS Corp. (CVS)
 Rite Aid Corp. (RAD)
 Wal-Mart (WMT)
► Pharmaceutical
more than grocery department
► Now offers a $4 generic prescription plan
 Drugstore.com
RCMP Position
► Own
500 shares in Walgreens
► Purchased at $25/share on 10/06/1999
► Sold 500 shares at $49.94/share on 9/14/2006
► Cost Basis is $12,500
► Stock is now trading at $21.40/share
► Valued
at $10,700
► Represents
► Unrealized
2.4% of portfolio market value
Loss of $1,800 or 14.4%
Shareholder Base
► 67%
of shares owned by institutional
investors
► 125,000 shares sold by insiders in last 6
months
Correlation
Business
Specialty
pharmacy
Prescription
drugs
Home infusion
Therapy provider
Drugstores
Nonprescription
Drugs
General
merchandise
Take care
Health
clinics
Product class
2008
2007
2006
2005
Prescription
66%
65%
64%
64%
Non-prescription
10%
10%
11%
11%
General Merchandise
24%
25%
25%
25%
► Prescription
sales continue to become a larger
portion of the company’s business.
 Aging population
 Introduction of lower priced generics (Medicare D)
 R&D of innovative drugs
Walgreen Outlook
► Advantages:
 Good reputation / quality
 Convenience of locations: High market share
 Economies of scale
 Aging population
► Risk
factors:
 Peaking generic drug cycle:
 Store saturation/cannibalization
 Competition from CVS/Caremark, Wal-Mart
 Diverging from original growth strategy
Porters Five Forces:
Retail Drug Industry
►
Rivalry: High
 Competitive Industry
 Direct mail pharmacy benefit managers
 Grocery stores & big box retailers
►
Threat of Substitutes: Low
 Few alternative choices for products sold at Walgreens/Drug Retailers
►
Bargaining Power of Buyers: Moderate
 Insurance companies
 Walgreens receives premium prices for front end convenience items
►
Bargaining Power of Suppliers: Moderate
 Watch government regulations / upcoming election
►
Barriers to Entry: Moderate
 High initial capital expenditures & supplier relationship required
Comparables
WAG
CVS
Market Cap:
21.18B
35.05B
379.52M
195.40B
2.56B
Qtrly Rev
Growth:
8.80%
2.10%
-1.10%
10.40%
13.40%
Revenue:
59.03B
84.90B
26.44B
397.38B
6.20B
28.19%
20.39%
27.31%
24.47%
27.31%
4.28B
6.65B
708.66M
29.79B
505.83M
5.83%
6.43%
0.53%
5.83%
4.87%
Net Income:
2.16B
3.06B
-1.44B
13.39B
N/A
EPS:
2.166
2.036
-1.78
3.361
0.74
P/E:
9.88
11.99
N/A
14.78
13.64
PEG:
0.76
0.79
N/A
1.3
0.86
P/S:
0.38
0.47
0.02
0.51
0.41
Gross Margin:
EBITDA:
Oper Margins:
RAD
WMT
Industry
Source: Yahoo Finance
1 Yr. Stock Performance
Source: Yahoo Finance
5 Yr. Stock Performance
Source: Yahoo Finance
Longs Bid Withdrawal
► Competitive
action vs. Failed action
 Caused CVS to overvalue Longs
 CVS must pay $71.50 per share
 Most likely has to access debt
►Challenging
debt market
►CVS must pay a penalty if it cannot access financing
Longs Bid Withdrawal
► Longs
is exposed to the poor condition of
the CA market
► Longs would have few synergies with WAG
► WAG did not want to risk its credit rating
 Senior unsecured debt was downgraded anyway
from AAA to AA
►EBIT
coverage ratio fell because of increase in LT
debt
►Uncertainty of strategic direction
►CEO Jeff Rein retired
Expectations
► Prescription
sales will grow
► Specialty Pharmacy sales will become a greater
part of the business
► 7000th store will open FY 2009
► Organic store growth will begin slowing in 2011
 Increases flexibility
 Slower sales growth
► Promotional
activity will be moderated
► People will return to their doctors as the economy
recovers
Generic Drugs Expectations
► Greater
use of generic drugs as baby
boomers retire and receive a fixed income
► A significant amount of brand name drugs
are expected to come off of patent between
2009-2011
 Currently, WAG is in a valley
►There
were few brand name drugs coming off of
patent in 2008
 Expect a peak within the next 3 years
Expectations
►A
new CEO is expected to lead Walgreens
 Upside potential
► Possible
political effects with more
affordable health care coming from different
plans
Valuation – DCF Analysis
► Cost
of equity = 7.6%
► Cost of debt = 5.36%
► Wacc = 7.35%
► Long term growth = 3%
► Stock Price = 23.55
Comparable’s data
► Strong
profitability margins; expected
decline over 5 years
► Strong Return on Equity, Return on Asset
numbers; expected decline
► Implied growth through PEG ratio lower
than industry average
► P/E ratio is lower than market and industry
average
EVA Analysis
► Strong
Return on Average Invested Capital,
expected decline going forward
Recommendation
► Hold
the stock at this price. People have
over-reacted and this has pushed the stock
price down. Company is well positioned as
compared to it’s peers
► New CEO could put the company back on
track.