Walgreens; Financial Statement Analysts Essay Example

while also considering acquisitions to increase market share. They are leveraging their economic size and promptly responding to changing customer demands. Moreover, they are expanding their services beyond traditional pharmacy with Health Services and striving to attract and retain top talent.

(Walgreen.com, 2007) This text focuses on the accounting aspects of balance sheets and ratios comparing Walgreens to CVS, one of its biggest competitors.

Company Background: Walgreens

In 1901, Chicago pharmacist Charles Walgreen borrowed $2,000 from his father as a down payment for his first drugstore. He sold half of the store in 1909 and purchased a second one, where he introduced a large soda fountain and began serving lunch. In 1916, seven stores merged under the name Walgreen Co. By 1920, there were 20 stores in Chicago, generating sales of $1.55 million. In 1927, the company was listed on the NYSE, and within two years, their 397 stores across 87 cities achieved sales of $47 million.

During the Great Depression, despite a decline in average sales per store from 1931 to 1935, Walgreen achieved relative success by focusing on efficiency throughout its chain. This emphasis on efficiency led to increased earnings per store (Walgreen.com, 2007). By 1940, Walgreen had a total of 489 stores; however, some were closed during World War II due to being unprofitable (Walgreen.com, 2007). In the 1950s, drugstores underwent a significant transformation with the introduction of self-service merchandising. Walgreen was at the forefront of this shift and opened its first self-serve store in 1952. They expanded to a total of 22 self-serve stores by the end of 1953. From the 1950s to the1960s, smaller and older stores were replaced by larger and more

efficient self-service units. Consequently, although there was only a modest increase of around10% in total store count during this period, sales soared by over90% (Walgreen.com,2007).

During the 1970s and 1980s, Walgreen.com experienced substantial growth and modernization. An important achievement occurred in 1984 when the company reached a significant milestone by successfully opening its 1,000th store. Furthermore, within a two-year period, Walgreen acquired 66 Medi Mart drugstores situated across five northeastern states.

_x000D_
(Walgreen. com, 2007) In the 1990s, Walgreen started its Healthcare Plus subsidiary to offer mail-order prescriptions. By 1997, this service was filling as many prescriptions per day as approximately 60 Walgreen stores. Additionally, in 1994, Walgreen, along with other independent drugstores, helped establish Pharmacy Direct Network to oversee prescription drug programs for group health plans. In 1995, Walgreen introduced WHP Health Initiatives, a prescription benefits management company targeting small to medium-sized employers and HMOs in the top 28 Walgreen markets. Furthermore, in 1996, Walgreen expanded by opening new stores in markets such as Las Vegas and Dallas._x000D_

(Walgreen.com, 2007) In 1999, Walgreen opened a full-service pharmacy online and also added over 450 stores in the same year. In 2002, Walgreen opened 471 stores and closed 108 stores. To support its rapid expansion, new distribution centers were launched in Jupiter, Florida, and Dallas. In 2003, Walgreen made its first significant acquisition in almost two decades by agreeing to purchase 16 drugstores from Hi-School Pharmacy, which were located in the Portland, Oregon, and Vancouver, Washington, metro areas

.

In 2003, Walgreen opened 430 stores and closed 86 (75 of which were relocated). The following year, in 2004, they added 355 new outlets (after store closings) and also opened a distribution center

in Moreno Valley, California. CVS, on the other hand, interprets the prescriptions of more US doctors than anyone else. While CVS fills more prescriptions at more drugstores than any other drugstore operator, its total sales are still lower than that of rival Walgreen. CVS has expanded its operations by acquiring the Eckerd chain and stores from Albertsons, bringing its total number of stores to over 6,200 in approximately 40 states. More recently, CVS acquired prescription benefits management (PBM) firm Caremark Rx for approximately $26.5 billion.

Caremark Pharmacy Services was created when Caremark was merged with CVS's PBM and specialty pharmacy subsidiary PharmaCare Management Services. Caremark Pharmacy Services provided managed-care drug programs to insurers, employers, and other healthcare plan providers. In the race to attract new customers, convenience has become more important than price, especially with the increasing use of managed-care health plans for prescription drugs. Co-pays are the same at any chain, and patients who are sick are often not in the mood for waiting. Walgreen has been leading the movement by establishing freestanding stores and creating a "convenience drugstore" chain. This strategy offers several advantages.

Walgreen's standalone stores are more visible and have ample parking and easy access for shoppers. Approximately 20% of their stores remain open 24 hours, and the chain's convenience is further enhanced by its drive-through pharmacies. To be closer to customers, Walgreen constructs new outlets in high-traffic locations, sometimes relocating stores just a few blocks away. (Hoover's Inc, 2007) In order to increase sales and differentiate itself from competitors like CVS, Walgreen is now including low-priced basic apparel in all of its stores. This product offering consists of various branded and private

label garments, ranging from bras to sweat suits, all priced below $50. (Hoover's Inc, 2007) In response to employers shifting to mail-order prescription services, Walgreen has been expanding its own mail-order business from annual sales of approximately $1.4 billion to over $5 billion.

(Hoover's Inc, 2007) Walgreen has a long-standing strategy of building new stores, but it has deviated from this approach in recent years. It recently agreed to purchase 53 pharmacies and other assets from Familymeds for approximately $60 million. In order to swiftly establish a presence in and around Delaware, Walgreen acquired the regional drugstore chain, Happy Harry's, in mid-2006. Happy Harry's operates roughly 75 stores in Delaware, Maryland, New Jersey, and Pennsylvania.

Walgreen is planning to buy Option Care, a specialty pharmacy and home infusion provider based in Illinois, for approximately $850 million. With over 100 stores in 34 states, Option Care will be added to Walgreen's growing portfolio. In addition to this acquisition, Walgreen has also announced the purchase of Home Pharmacy, a California-based provider of infusion and specialty pharmacy services. To support its growth strategy, Walgreen plans to establish a new distribution center in South Carolina by 2007 and another facility in Connecticut by 2009. The company aims to expand its number of stores by around 500 this year and surpass 7,000 stores by 2010. Apart from its core pharmacy offerings, Walgreen provides prescription drug and medical plans through Walgreens Health Services to cater to patients' needs. Furthermore, its subsidiary called Walgreens Health Initiatives offers various services including specialty pharmacy, mail-order pharmacy, and pharmacy benefits management.

Walgreen and Take Care Health Systems have partnered to establish Health Corner Clinics within Walgreen stores, with

the intention of boosting prescription sales and improving customer loyalty. In a cash-only transaction, Walgreen recently acquired Take Care Health Systems in order to expand their clinic count from approximately 60 to over 400 by the end of 2008. These clinics are overseen by nurse practitioners (Hoover's Inc, 2007). Consequently, this financial analysis concentrates on Walgreens' operating revenue and operating losses for the year 2007.

Walgreens has experienced consistent growth in operating revenue over the past three years. However, an analysis of 2007 shows a decline in revenue during the third quarter. In addition, there was a significant decrease in cash and equivalents in 2007 compared to a notable increase in 2006 for Walgreens' liquid assets. When comparing with competitor CVS based on 2007 data, CVS holds more cash and equivalents.

Examining the working capital graphs above reveals that Walgreens has consistently witnessed a decline in its working capital (current assets minus current liabilities) over the past three years. Despite this decline, as long as Walgreens remains within positive figures, it will still be able to meet its liabilities when necessary.

Both Walgreens and CVS have positive current ratios (current assets divided by current liabilities), indicating that they are financially well-positioned to pay off their present bills. The quick ratio (cash plus accounts receivable divided by current liabilities), also known as acid-test ratio, is another metric reflecting both companies' ability to handle short-term obligations.

Analyzing the graphs provided, one can conclude that if Walgreens were to only focus on paying its bills without selling its inventory, they would still be able to do so. This is supported by the information shown above. Activity measures, such as turnover, focus on

the relationship between asset level and sales. The following graphs assist analysts in measuring the activity of Walgreens and its two main competitors (Marshall, McManus, and Viele, 2007). The asset turnover graph for the past three years indicates that Walgreens is efficient in their revenue-generating processes. Among the three companies, Walgreens has a 1 to 1 asset turnover ratio.

Walgreens is surpassing its competition by 5 points in terms of profitability. The company's capacity to gather accounts receivable more quickly enables it to obtain cash earlier. On average, Walgreens requires roughly 14 days to collect these accounts, which exceeds CVS. Profitability metrics, like Return on Investment (ROI) and Return on Equity (ROE), serve as indications of a company's prosperity. These assessments evaluate income and various methods for measuring it within the company. The given graphs will demonstrate Walgreens' profitability and compare it with its primary rival.

Walgreens' return on equity (ROE) was 18.9 in 2006 and dropped to 18.4 in the subsequent year, 2007. However, even with this decrease, Walgreens continues to have a higher ROE than CVS. In summary, Walgreens' ROE initially rose from 18.9 in 2006 but later declined to 18.4 by 2007.

Despite a decrease in Walgreens' return on equity (ROE), it still exceeds that of CVS. The market price of Walgreens is higher than CVS, as indicated by the price/earnings ratio. In 2006, there was a slight drop in Walgreen's P/E ratio, followed by a slight increase. Over the past three years, the dividend payout ratio for Walgreens has remained constant and is higher than that of CVS in 2007. A Financial Ratio report can be used to compare different companies or time periods

and provide a convenient analysis table. This report will visually represent the conducted analysis through charts and graphs.

Liquidity measures include working capital, current ratio, and acid-test ratio. The inventory cost-flow assumption affects working capital. Walgreens uses the Last in First out (LIFO) cost flow, while CVS uses First in First out (FIFO).