WALGREENS Andy Guar, Akrati Johari, Mike Lavin, Yanyan Xu, Yili Xu

1. WALGREENSAndy Guar, Akrati Johari, Mike Lavin, Yanyan Xu, Yili Xu Presented on 10/22/2009

2. Deliverable Outline 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

3. History 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.

5. Present 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 7 Source: https://materials.proxyvote.com/Approved/931422/20081121/AR_28708/HTML2/walgreens-ar2008_0040.htm (Accessed Oct 8, 2009)

8. Business Strategy (continued) 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 8

9. Business Model 9 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 10 Source: http://en.wikipedia.org/wiki/Walgreens (Accessed Oct 10, 2009)

11. Business Locations 11 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. 12

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 13

14. Macro-economic Outlook 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 In recent years the drug retail sector has been growing at a fluctuating rate. 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=INDUSTRYSUMMARY( Accessed September 30, 2009)

16. SWOT Analysis/Porter’s Five Forces Large number of buyers weakens buyer power, but negligible switching costs strengthens it.  MODERATE THREAT 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 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=INDUSTRYSUMMARY( 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, 'CVSPharmacy'. 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=INDUSTRYSUMMARY( Accessed September 30, 2009)

18. Competitors- Comparative Ratios 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)

19. Assumptions – Business Mix • Fundamental shift in business mix towards prescription drugs

20. Assumptions – Store Sales • Management estimates coupled with focus on same store growth and remodeling

21. WACC • Focus on Goal Post, which uses an average cost of equity from CAPM and ROE

22. Goal Post • Appears low compared to current price of ~$40, look at operating leases!

23. WACC – Contractual Obligations • Focus on Goal Post, which uses an average cost of equity from CAPM and ROE

24. Goal Post – Contractual Obligations • Operating leases significantly change the intrinsic value

25. Multiples Valuation

26. Multiples Valuation Range : $ 25 - 35

27. Client Portfolio 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

31. RCMP Current portfolio

32. Transaction history & RCMP Correlation • October 6th, 1999, entered position • 1000 shares at $25.00 per share • September 20th, 2006 • Sold 500 shares at $49.94 /share • Realized gain of $12,470 • Current Position • Own 500 shares • Current unrealized profit $ 7477.50

33. Recommendation Hold 500 shares @ $39.64 Intrinsic value range @ $34-42 Strong management Focused on same store growth Concentrating on generic drugs with higher profit margin Customer Centric Pharmacy Wellness Program