WALGREEN CO.

1. WALGREEN CO. Matt Byford Brandon Honey Shivam Khanna Joe Vaccaro October 28, 2008

2. Agenda • Company Overview • Macroeconomic Overview • Industry Overview • Recent Developments • Forecasting/Expectations • Valuation of Walgreens • Recommendation

3. 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

4. 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.

5. 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

6. Macroeconomic Overview Decline in Consumer Confidence CCI hit all time low in June 2008 (51)

7. Macroeconomic Overview • Oil continues to be volatile, but lower prices will have positive impact on economy • Cost to do business will be lower

8. 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

9. 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

10. 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 at more than 98% of stores • Touch tone prescription refills • 50% of people live within 2 miles of a Walgreens

11. 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

12. 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 2.4% of portfolio market value • Unrealized Loss of $1,800 or 14.4%

13. Shareholder Base • 67% of shares owned by institutional investors • 125,000 shares sold by insiders in last 6 months

14. Correlation

15. Business Specialty pharmacy Drugstores Home infusion Therapy provider Prescription drugs Nonprescription Drugs General merchandise Take care Health clinics

16. Product class 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

17. 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

18. 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

19. Comparables Source: Yahoo Finance

20. 1 Yr. Stock Performance Source: Yahoo Finance

21. 5 Yr. Stock Performance Source: Yahoo Finance

22. 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

23. 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

24. 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

25. 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

26. Expectations • A new CEO is expected to lead Walgreens • Upside potential • Possible political effects with more affordable health care coming from different plans

27. Valuation – DCF Analysis • Cost of equity = 7.6% • Cost of debt = 5.36% • Wacc = 7.35% • Long term growth = 3% • Stock Price = 23.55

28. 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

29. EVA Analysis • Strong Return on Average Invested Capital, expected decline going forward

30. 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.