Analysts:

1
14-Oct- 2010

• Analysts
• MATT HAWK
• ROGER HONG
• YE JIANG
• PRATEEK SHARMA

2
OUTLINE

• Company overview
• SWOT analysis
• Macro economy review
• Industry analysis/ Porters Five Forces
• Competitors
• DCF valuation
• Recommendation

3
OUR HOLDINGS

• RCMP currently owns 500 shares of WAG

4
WAG DETAIL

• RCMP purchased WAG 1,000 shares at 25/share on
  Oct. 06, 1999
• RCMP sold WAG 500 shares at 49.94
• Realized gain 12,470
• Currently owns 500 shares trading at 34.27 (as
  of Oct. 17, 2010)
• Unrealized gain 4,635

5
HISTORY

• 1901 Charles R Walgreens Sr. purchased
  Chicago Drug Store where he had worked as a
  pharmacist -Start
  of Walgreens Chain
• 1926 Opened 100th Store
• 1927 Walgreens Co. Stock went Public
  
• 1975 Sales reached 1 Billion
• 1984 Opened 1000th store
• 1994 Opened 2000th store
• 2005 Opened 5000th store
• 2009 Opened 7000th store

6
PRESENT

• Walgreens is a retail drugstore chain that sells
  prescription and non-prescription drugs, and
  general merchandise
• As of Aug. 31, 2010, Walgreens operated 8,046
  locations in all 50 states, the District of
  Columbia, Puerto Rico and Guam. It employs around
  238,000 people
• Sales increased 7.4 percent to a record 16.9
  billion for the fourth quarter and 6.4 percent to
  a record 67.4 billion for the fiscal 2010
• Walgreens filled a record 778 million
  prescriptions in fiscal 2010 an increase of 7.5
  percent. Prescription sales 65

7
RECENT EVENTS

• Sept 2010 Walgreens and Omnicare reached an
  agreement in which Omnicare will acquire all of
  the assets of Walgreens long-term care pharmacy
  business, and in return Walgreens will acquire
  all of the assets of Omnicares home infusion
  businesses
• Aug 2010 Walgreens announced an agreement with
  Graymark Healthcare Inc. (NASDAQ GRMH) in which
  the company will acquire the assets of 18
  ApothecaryRx pharmacies located in Colorado,
  Oklahoma, Minnesota, Missouri and Illinois
• April 2010 Walgreens acquired Duane Reade
  Holdings, Inc for approx 1.1bn. The transaction
  included all 258 Duane Reade stores in the New
  York City metropolitan area, as well as Duane
  Reades corporate office and two distribution
  centers

8
STOCK PERFORMANCE
9
MANAGEMENT
Key Executives
Mr. Gregory D. Wasson President and CEO (Feb. 2009)
Mr. Mark A. Wagner President-Community Management (Sept. 2010)
Mr. Kermit R. Crawford President-Pharmacy Services (Sept. 2010)
Mr. Wade D. Miquelon Executive Vice President-Chief Financial Officer (July 2009, joined from Tyson Food in 2008)
10
GROWTH STRATEGY

• Three Primary Components
• Leveraging the best store network in America
• Within five miles of nearly three-quarters of all
  Americans
• Enhancing customer Experience
• Customer Centric Retailing(CCR) feature lower
  shelves and about 15 percent fewer individual
  items, which provides a more efficient and
  convenient shopping experience for todays busy
  consumers. (Now more than 1,800 stores)
• Beer and wine was added to more than 3,500 stores
  and now is available in a total of nearly 4,200
  stores
• Driving cost reduction and productivity gain
• Rewiring for Growth Target for 1 billion in
  annual savings in fiscal 2011

11
SWOT ANALYSIS
Strengths Weakness
Market Leadership (approx 30 mkt share) Consolidation of market reduced independent drug stores Geographic Concentration - CA, FL, TX,IL, NY ?40 Declining Operating Margin -5.13 in 2010 vs. 5.8 Avg. last 5 yrs
Opportunity Threat
Develop drive-thru model In-store clinics Aging Baby Boomers Patent expirations on generics in 2012/2013 From mass merchandisers ( they can afford lower margins) Mail-order businesses (offer greater convenience) Dependence on Medicare/Medicaid (reduction in rates could affect margins)
12
MACROECONOMIC REVIEW

• Macro economy current
• The tough economic conditions of 2008 and 2009
  had a lasting effect on consumer behavior.
  Concern over high unemployment and declined
  consumer confidence affect customers spending
  habit. Price has become the single most important
  factor in making the purchase decision
• Consumer confidence
  Unemployment

Sourcehttp//mjperry.blogspot.com/2010/06/consume
r-confidence-highest-since-jan.html
13
MACROECONOMIC REVIEW

• As the economy begins to strengthen in 2010 and
  2011, decreasing unemployment and rising income
  levels should boost this industrys
  pharmaceutical as well as front-end sales
• Also, as more consumers gain employment, the
  level of insurance coverage is expected to rise,
  thus increasing the likelihood people will
  purchase pills and other medicine
• Increase in health awareness among people will
  lead to increase in front-end sales of health
  related products
• Increased spending by the government on
  Medicare/Medicaid is expected to boost sales

14
INDUSTRY ANALYSIS

• Industry Outlook
• The industry outlook is positive Sales will
  maintain growth due to an aging population,
  longer life expectancy and healthcare reform.
  Revenue is forecast to grow at an average
  annualized rate of 3.1 to total 251.9 billion
  in 2015
• Highly Competitive Industry
• MA The industry will slow its new store
  openings after decades of rapid expansion, and
  consolidation will continue. Enterprise numbers
  will decline at an average annualized rate of
  1.3 to settle at about 21,786 companies during
  the next five years
• Price As Mass merchants, mail-order pharmacies
  and PBMs (pharmacy benefit managers ) continue to
  pose a threat to industry sales, they place
  downward pressure on prices
• 
  
• 
  
• 
  SourcePharmaciesDrug Stores in the US,
  ISBS World Industry Report 44611, July 2010

15

• Medical reimbursement level
• Certain provisions of the Deficit Reduction Act
  of 2005 seek to reduce federal spending by
  altering the Medicaid reimbursement formula for
  generic drugs. These changes are expected to
  result in reduced Medicaid reimbursement rates
  for prescription
• Health reform
• Expand insurance coverage and subsequently
  increase pharmaceuticals demand as they become
  more affordable
• The government is expected to initiate cost
  cutting, which could adversely affect profit
  margins

Sourcehttps//materials.proxyvote.com/Approved/93
1422/20091116/AR_48630/HTML2/default.htm
16
PORTERS FIVE FORCES

• Barrier to Entry Medium
• Consolidation that is creating large players
  with deep resources
• Government and state laws and regulations
• Threat of substitutes
• Drugs Low Few alternative
  choices, inelastic demand
• General Merchandise High Supermarkets
  are large threats
• Bargaining power of buyers Moderate
• Inelastic demand but thinning profit margin
• Bargaining power of suppliers Moderate
• The large retailers purchase directly from
  several suppliers, strong relationship
• Rivalry among existing competitors High
• Both internal and external sources, including
  other drug store chains or independent drug
  stores, supermarket chains, mass merchandisers,
  on-line retailers and mail order pharmacies

17
COMPETITORS - DESCRIPTION

• CVS Caremark CVS Caremark operates in two
  segments Pharmacy Services and Retail Pharmacy.
  The Retail Pharmacy segment sells prescription
  drugs, over-the-counter drugs, beauty products
  and cosmetics, photo finishing, seasonal
  merchandise, greeting cards, and convenience
  foods through its pharmacy retail stores and
  online. It operates approx. 7,000 retail stores.
  For the year ending 31-Dec-2009, it reported
  sales of 98.729B
• Rite Aid Corporation Rite Aid operates retail
  pharmacy stores . As of Feb 2010, it operated
  around 4,780 stores. It sells prescription drugs
  and an assortment of other merchandise. For the
  year ending Feb 2010, it reported a loss of
  506.7M on revenues of 25.37B

18
COMPARATIVE RATIOS
Company Walgreens CVS Caremark Rite Aid
Ticker WAG CVS RAD Current ROE Current ROA
Profit Margin 3.45 3.76 -2.88 3.1
Asset Turnover 2.62 1.61 3.2 2.62
Equity Multiplier 1.85 1.93 - 1.79
ROE (5-yr avg.) 16.71 11.69 -256.66 14.53 8.13
Source Capital IQ
19
SALES FORECAST

• We have optimistic growth expectations for WAG,
  expecting it to rebound from the economic turmoil
  it faced over the past two years

20
GROWTH DRIVERS

• "Our use of cash has been, and will continue to
  be, guided by a capital policy that commits us to
  maintaining a strong balance sheet and financial
  flexibility reinvesting in core strategies and
  related strategic activities and returning
  surplus cash to shareholders in the form of
  dividends and share repurchases,
• - Greg Wasson

21
GROWTH DRIVERS (Cont.)

• Strong balance sheet and financial flexibility
• Allows WAG to return income to shareholders in
  the form of dividends and stock repurchases
• Slow store growth to free up capital and focus on
  WAGs core business
• 2009 Repurchase Program
• 2008 Rewiring for Growth Program
• Enhance the customer experience (CCR)
• Extend their presence in pharmacy, health and
  wellness services
• Cost reduction and productivity gain
• Reduce on-hand inventory
• Eliminate 3,500 products

Sourcehttp//news.walgreens.com/article_display.c
fm?article_id5260
22
RESULTS

• Sustain long-term revenue growth
• Increase margins through cost reduction
  (Rewiring for Growth)
• 2010 - 600 million cost reduction
• 2011 - 1000 million cost reduction (400 million
  net gains)
• Double digit EPS growth
• 30-35 return to shareholders
• Low leverage allows WAG to compensate equity
  holders

Sourcehttp//news.walgreens.com/article_display.c
fm?article_id5260
23
ROE
24
DEBT SCHEDULE(WITHOUT OPERATING LEASES)
25
DEBT SCHEDULE(WITH OPERATING LEASES)
Although WAG doesnt have much long-term debt,
its operating leases make it a much more highly
levered company
26
WACC W/ OPERATING LEASES
Risk Free Rate (Rf) 2.46
Beta 0.82
Market Risk Premium 6.00
Cost of Equity (CAPM) 7.38
Cost of Debt 5.25
Tax Rate 36.53
Cost of Debt (After-tax) 3.33
Weight of Equity 0.605
Wight of debt 0.395
WACC 8.63
COST OF EQUITY
CAPM COMBINED ROE
7.38 12.09 16.79
Cost of Debt WACC Cost of Equity
3.33 8.63 12.09
Weight 39.50 Weight 60.50
27
DCF W/ OPERATING LEASES
28
RELATIVE VALUATION
Parameter Ratio Value
P/E(ttm) 16.22 34.41
Forward P/E 13.50 28.89
P/S(ttm) 0.49 32.36
P/B 2.31 32.40
Price Range 28-34
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PERFORMANCE OVER TIME
30
RECOMMENDATION

• Hold 500 shares at current price
• Any merger or acquisition in the industry could
  provide stimulus to stock price
• Regular dividend paying stock
• Consistently outperformed both SP 500 and DJIA