Walgreens – 2011

Forest David

A. Case Abstract
Walgreens is a comprehensive strategic management case that includes the company’s year-end 2010
financial statements, organizational chart, competitor information and more. The case time setting is the
year 2011. Sufficient internal and external data are provided to enable students to evaluate current
strategies and recommend a three-year strategic plan for the company. Headquartered in Deerfield, Illinois,
Walgreens’ common stock is publicly traded under the ticker symbol WAG.

The nation's largest drugstore chain with fiscal 2011 sales of $72 billion, Walgreens operates 7,779
drugstores in all 50 states, the District of Columbia and Puerto Rico. Walgreens provides nearly 6 million
customers daily the most convenient, multi-channel access to consumer goods and services and trusted,
cost-effective pharmacy, health and wellness services and advice in communities across America.
Walgreens subsidiary, Take Care Health Systems, is the largest and most comprehensive manager of
worksite health and wellness centers and in-store convenient care clinics, with more than 700 locations
throughout the United States.

B. Vision Statement (proposed)

To become the number one drug retail store in the world.

C. Mission Statement (proposed)

We provide the most convenient access to consumer goods and services, pharmacy, health and wellness
services (2) in the United States (3). We will earn the trust of our customers (1) and build shareholder value
(5) and are motivated to implement the Green Revolution. At Walgreens we are on the cutting edge of
technological progression to increase customer value (8). We treat each other with respect and dignity and
do the same for all we serve. We offer the best customer service and keep our product quality standards
high (7). We offer employees of all backgrounds a place to build careers (9) and are committed to utilizing
the latest cutting edge technology to provide utmost customer satisfaction and shareholder wealth (4).

1. Customers
2. Products or services
3. Markets
4. Technology
5. Concern for survival, growth, and profitability
6. Philosophy
7. Self-concept
8. Concern for public image
9. Concern for employees

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

D. External Audit
Opportunities

1. 32 million more Americans gaining access to coverage in 2014.

2. Enhancing and expanding our private brand offerings.
3. Capitalize on "green revolution" via geothermal energy.
4. Capitalize on increasing elderly clientele.
5. National specialty pharmacy expenditure trends.
6. Reach the growing Spanish speaking community.
7. On site hospital pharmacies.
8. Online delivery expansion.
9. Globalization has provided untapped foreign markets.
10. Expansion into Midwestern America.

Threats

1. Economic conditions and high unemployment rates.

2. Predicted shortage of pharmacists of 150,000 by 2020.
3. Government regulation.
4. Discount Retailers and Grocery Chains.
5. International On-line pharmacies.
6. Rising health-care costs.
7. Rising drug costs related to patent ending drugs.
8. Un-researched claims of new over-the-counter drugs.
9. Lawsuits related to non-compliant personnel.
10. Mergers between competitors.

Competitive Profile Matrix

CVS Walgreen Rite-Aid

Critical Success Factors Weight Rating Score Rating Score Rating Score
Advertising 0.07 2 0.14 4 0.28 3 0.21
Market Penetration 0.08 4 0.32 3 0.24 2 0.16
Customer Service 0.10 3 0.30 4 0.40 2 0.20
Store Locations 0.08 3 0.24 4 0.32 2 0.16
Services Offered 0.08 4 0.32 3 0.24 2 0.16
Employee Dedication 0.08 4 0.32 3 0.24 2 0.16
Financial Profit 0.10 3 0.30 4 0.40 2 0.20
Customer Loyalty 0.10 3 0.30 4 0.40 2 0.20
Market Share 0.08 3 0.24 4 0.32 2 0.16
Product Quality 0.08 3 0.24 4 0.32 2 0.16
Top Management 0.05 3 0.15 4 0.20 2 0.10
Price Competitiveness 0.10 3 0.30 2 0.20 4 0.40
Totals 1.00 3.17 3.56 2.27

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

 EFE Matrix

Opportunities Weight Rating Weighted Score

1. 32 million more Americans gaining access to coverage in 2014. 0.07 3 0.21
2. Enhancing and expanding our private brand offerings. 0.07 4 0.28
3. Capitalize on "green revolution" via geothermal energy. 0.04 3 0.12
4. Capitalize on increasing elderly clientele. 0.04 2 0.08
5. National specialty pharmacy expenditure trends. 0.05 4 0.20
6. Reach the growing Spanish speaking community. 0.05 1 0.05
7. On site hospital pharmacies. 0.04 2 0.08
8. Online delivery expansion. 0.05 4 0.20
9. Globalization has provided untapped foreign markets. 0.04 1 0.04
10. Expansion into Midwestern America. 0.06 3 0.18

Threats Weight Rating Weighted Score

1. Economic conditions and high unemployment rates. 0.07 4 0.28
2. Predicted shortage of pharmacists of 150,000 by 2020. 0.03 3 0.09
3. Government regulation. 0.05 3 0.15
4. Discount retailers and grocery chains. 0.05 3 0.15
5. International on-line pharmacies. 0.04 4 0.16
6. Rising health-care costs. 0.06 4 0.24
7. Rising drug costs related to patent ending drugs. 0.03 4 0.12
8. Un-researched claims of new over-the-counter drugs. 0.02 3 0.06
9. Lawsuits related to non-compliant personnel. 0.08 4 0.32
10. Mergers between competitors. 0.06 3 0.18
TOTALS 1.00 3.19

E. Internal Audit
Strengths

1. Prescription fillings have increased 7.5% in 2010.

2. Net earnings increased 4.2% in the 2010 fiscal year.
3. Preventing and managing chronic medical conditions.
4. Community Management Program.
5. Walgreens emphasizes diversity among employees.
6. Walgreens stores are located within five miles of nearly 75% of all Americans.
7. The largest retail network of pharmacists certified to provide immunizations.
8. Company increased net sales by 6.4% in 2010.
9. Over the past 8 years, Walgreens dividends have grown at a compound annual growth rate of almost
22%.
10. The nation's largest drug store chain, with 2010 fiscal sales of 67 billion dollars.

Weaknesses

1. Walgreens ranked 6th most innovative health care company for leadership in health care services by
Fast Company magazine.
2. Average collection period has increased 14.9% since 2008.
3. Does not price match.
4. Stock price performance.

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

5. Net Profit Margin is 14% below industry average.
6. Organizational structure isn't streamlined.
7. Walgreens ranks 4th in customer satisfaction.
8. Product and Services differentiation.
9. Annual closings increased by 22% since 2006.
10. New location expansion decreased by 36% in 2010.

Financial Ratio Analysis

Growth Rate Percent WAG Industry S&P 500

Sales (Qtr vs year ago qtr) 6.50 10.10 14.50
Net Income (YTD vs YTD) - - -
Net Income (Qtr vs year ago qtr) 68.50 28.20 77.20
Sales (5-Year Annual Avg.) 8.77 14.79 8.28
Net Income (5-Year Annual Avg.) 9.17 15.92 8.69
Dividends (5-Year Annual Avg.) 22.44 18.77 5.72

Profit Margin Percent

Gross Margin 28.4 22.6 39.6
Pre-Tax Margin 6.0 5.7 18.1
Net Profit Margin 3.8 3.6 13.2
5Yr Gross Margin (5-Year Avg.) 28.2 21.8 39.6

Liquidity Ratios
Debt/Equity Ratio 0.16 0.27 0.97
Current Ratio 1.5 1.6 1.2
Quick Ratio 0.5 0.7 0.8

Profitability Ratios
Return On Equity 18.6 12.9 27.5
Return On Assets 10.1 7.1 8.7
Return On Capital 14.2 9.4 11.5
Return On Equity (5-Year Avg.) 16.9 12.5 23.8
Return On Assets (5-Year Avg.) 9.5 6.9 8.0
Return On Capital (5-Year Avg.) 13.6 9.4 10.7

Efficiency Ratios
Income/Employee 15,420 18,937 125,384
Revenue/Employee 410,136 482,478 1 Mil
Receivable Turnover 29.2 22.2 14.9

Net Worth Analysis (in millions)

Stockholders' Equity $14,847

Net Income x 5 $13,570
(Share Price/EPS) x Net Income $31,386
Number of Shares Outstanding x Share Price $30,226
Method Average $22,507

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

 IFE Matrix

Strengths Weight Rating Weighted Score

1. Prescription fillings have increased 7.5% in 2010. 0.05 3 0.15
2. Net earnings increased 4.2% in the 2010 fiscal year. 0.05 4 0.20
3. Preventing and managing chronic medical conditions. 0.06 4 0.24
4. Community Management Program. 0.05 3 0.15
5. Walgreens emphasizes diversity among employees. 0.06 4 0.24
6. Walgreens stores are located within five miles of nearly 75% of
0.05 3 0.15
all Americans.
7. The largest retail network of pharmacists certified to provide
0.06 4 0.24
immunizations.
8. Company increased net sales by 6.4% in 2010. 0.03 4 0.12
9. Over the past 8 years, Walgreens dividends have grown at a
0.04 3 0.12
compound annual growth rate of almost 22%.
10. The nation's largest drug store chain, with 2010 fiscal sales of 67
0.06 4 0.24
billion dollars.

Weaknesses Weight Rating Weighted Score

1. Walgreens ranked 6th most innovative health care company for
0.04 2 0.08
leadership in health care services by Fast Company magazine.
2. Average collection period has increased 14.9% since 2008. 0.04 2 0.08
3. Does not price match. 0.06 1 0.06
4. Stock Price Performance. 0.06 1 0.06
5. Net Profit Margin is 14% below industry average. 0.04 1 0.04
6. Organizational structure isn't streamlined. 0.05 2 0.10
7. Walgreens ranks 4th in customer satisfaction. 0.06 2 0.12
8. Product and Services differentiation. 0.04 2 0.08
9. Annual closings increased by 22% since 2006. 0.04 2 0.08
10. New location expansion decreased by 36% in 2010. 0.06 2 0.12
TOTALS 1.00 2.67

F. SWOT
SO Strategies

1. Expand onsite hospital presence (S2, O7).

2. Target elderly clientele though advertising on preventing chronic medical conditions (S3, O4).
3. Expand online ordering for pickup (S6, O8).

WO Strategies

1. Implement onsite hospital stores to increase service differentiation (O8, W8).

2. Increase profits though private brand offerings (O2, W5).
3. Reach 32 million newly insured Americans with new store openings (O1, W10).

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

 ST Strategies

1. Use Community Management Program to address economic conditions and unemployment (S4, T1).
2. Set aside profits for fighting future lawsuits (S2, T9).
3. Continue expansion of drug stores (S10, T10).

WT Strategies

1. Implement training imitative to increase customer satisfaction (W6, T9).

2. Increase funds for R&D (W1, T10).
3. Offer price matching campaign to increase competitiveness (W3, T4).

G. SPACE Matrix

FP
Conservative Aggressive
7

CP IP
-7 -6 -5 -4 -3 -2 -1 1 2 3 4 5 6 7
-1

-2

-3

-4

-5

-6

-7
Defensive Competitive
SP

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

Internal Analysis: External Analysis:
Financial Position (FP) Stability Position (SP)
ROE 6 Rate of Inflation -1
Leverage 7 Technological Changes -2
Liquidity 5 Price Elasticity of Demand -3
Return on Capital 7 Competitive Pressure -7
Sales 2 Barriers to Entry into Market -5
Financial Position (FP) Average 5.4 Stability Position (SP) Average -3.6

Internal Analysis: External Analysis:

Competitive Position (CP) Industry Position (IP)
Market Share -3 Growth Potential 6
Product Quality -3 Financial Stability 6
Customer Loyalty -3 Ease of Entry into Market 2
Technological know-how -4 Resource Utilization 5
Control over Suppliers and Distributors -4 Profit Potential 5
Competitive Position (CP) Average -3.4 Industry Position (IP) Average 4.8

H. Grand Strategy Matrix

Rapid Market Growth

Quadrant II Quadrant I

WAG

Weak Strong
Competitive Competitive
Position Position

Quadrant III Quadrant IV

Slow Market Growth

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

I. The Internal-External (IE) Matrix

The Total IFE Weighted Scores

Strong Average Weak
4.0 to 3.0 2.99 to 2.0 1.99 to 1.0
4.0 I II III

High

3.0 IV V VI

The
EFE
Total Medium
Weighted
Scores

Walgreens

2.0 VII VIII IX

Low

1.0

Revenues
Product Class 2010 2009 2008
Prescription Drugs 65% 65% 65%
Non-Prescription Drugs 10% 10% 10%
General Merchandise 25% 25% 25%

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

J. QSPM

Design 20
Build 500 stores onsite hospital
stores
Opportunities Weight AS TAS AS TAS
1. 32 million more Americans gaining access to coverage in 2014. 0.07 4 0.28 3 0.21
2. Enhancing and expanding our private brand offerings. 0.07 0 0.00 0 0.00
3. Capitalize on "green revolution" via geothermal energy. 0.04 0 0.00 0 0.00
4. Capitalize on increasing elderly clientele. 0.04 3 0.12 4 0.16
5. National specialty pharmacy expenditure trends. 0.05 4 0.20 1 0.05
6. Reach the growing Spanish speaking community. 0.05 3 0.15 1 0.05
7. On site hospital pharmacies. 0.04 1 0.04 4 0.16
8. Online delivery expansion. 0.05 0 0.00 0 0.00
9. Globalization has provided untapped foreign markets. 0.04 0 0.00 0 0.00
10. Expansion into Midwestern America. 0.06 4 0.24 2 0.12

Threats Weight AS TAS AS TAS

1. Economic conditions and high unemployment rates. 0.07 0 0.00 0 0.00
2. Predicted shortage of pharmacists of 150,000 by 2020. 0.03 1 0.03 3 0.09
3. Government regulation. 0.05 0 0.00 0 0.00
4. Discount retailers and grocery chains. 0.05 0 0.00 0 0.00
5. International on-line pharmacies. 0.04 0 0.00 0 0.00
6. Rising health-care costs. 0.06 1 0.06 2 0.12
7. Rising drug costs related to patent ending drugs. 0.03 0 0.00 0 0.00
8. Un-researched claims of new over-the-counter drugs. 0.02 0 0.00 0 0.00
9. Lawsuits related to non-compliant personnel. 0.08 0 0.00 0 0.00
10. Mergers between competitors. 0.06 4 0.24 2 0.12

Design 20
Build 500 stores onsite hospital
stores
Strengths Weight AS TAS AS TAS
1. Prescription fillings have increased 7.5% in 2010. 0.05 4 0.20 3 0.15
2. Net earnings increased 4.2% in the 2010 fiscal year. 0.05 3 0.15 2 0.10
3. Preventing and managing chronic medical conditions. 0.06 0 0.00 0 0.00
4. Community Management Program. 0.05 3 0.15 2 0.10
5. Walgreens emphasizes diversity among employees. 0.06 0 0.00 0 0.00
6. Walgreens stores are located within five miles of nearly 75% of
0.05 4 0.20 1 0.05
all Americans.
7. The largest retail network of pharmacists certified to provide
0.06 0 0.00 0 0.00
immunizations.
8. Company increased net sales by 6.4% in 2010. 0.03 3 0.09 2 0.06
9. Over the past 8 years, Walgreens dividends have grown at a
0.04 3 0.12 2 0.08
compound annual growth rate of almost 22%.
10. The nation's largest drug store chain, with 2010 fiscal sales of 67
0.06 4 0.24 3 0.18
billion dollars.

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

 Weaknesses Weight AS TAS AS TAS
1. Walgreens ranked 6th most innovative health care company for
0.04 4 0.16 3 0.12
leadership in health care services by Fast Company magazine.
2. Average collection period has increased 14.9% since 2008. 0.04 0 0.00 0 0.00
3. Does not price match. 0.06 0 0.00 0 0.00
4. Stock Price Performance. 0.06 0 0.00 0 0.00
5. Net Profit Margin is 14% below industry average. 0.04 0 0.00 0 0.00
6. Organizational structure isn't streamlined. 0.05 0 0.00 0 0.00
7. Walgreens ranks 4th in customer satisfaction. 0.06 0 0.00 0 0.00
8. Product and Services differentiation. 0.04 3 0.12 1 0.04
9. Annual closings increased by 22% since 2006. 0.04 0 0.00 0 0.00
10. New location expansion decreased by 36% in 2010. 0.06 4 0.24 3 0.18
Totals 3.03 2.14

K. Recommendations
1. Build 500 new stores at $1.5M average for $750M.
2. Design 20 onsite units in hospitals for 0.5M for $10M.

L. EPS/EBIT Analysis (in millions)

Amount Needed: $760
Stock Price: $34
Shares Outstanding: 889
Interest Rate: 5%
Tax Rate: 37%

Common Stock Financing Debt Financing

Recession Normal Boom Recession Normal Boom
EBIT $3,000 $4,000 $5,000 $3,000 $4,000 $5,000
Interest 0 0 0 38 38 38
EBT 3,000 4,000 5,000 2,962 3,962 4,962
Taxes 1,110 1,480 1,850 1,096 1,466 1,836
EAT 1,890 2,520 3,150 1,866 2,496 3,126
# Shares 911 911 911 889 889 889
EPS 2.07 2.77 3.46 2.10 2.81 3.52

20 Percent Stock 80 Percent Stock

Recession Normal Boom Recession Normal Boom
EBIT $3,000 $4,000 $5,000 $3,000 $4,000 $5,000
Interest 30 30 30 8 8 8
EBT 2,970 3,970 4,970 2,992 3,992 4,992
Taxes 1,099 1,469 1,839 1,107 1,477 1,847
EAT 1,871 2,501 3,131 1,885 2,515 3,145
# Shares 893 893 893 907 907 907
EPS 2.09 2.80 3.50 2.08 2.77 3.47

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

M. Epilogue
In October 2011, Walgreen Co. declared a regular quarterly dividend of 22.5 cents per share, a 28.6 percent
increase over the year-ago dividend. The dividend is payable December 12, 2011, to shareholders of record
November 14, 2011. Walgreens has paid a dividend in 316 straight quarters (79 years) and has raised its
dividend for 36 consecutive years. Since the beginning of fiscal year 2007, Walgreens annual dividend rate
has increased from 31 cents per share to 90 cents per share, resulting in a five-year compound annual
growth rate of 23.8 percent.

To the dismay of investors, Walgreens has made no substantive progress in its contract renewal
negotiations with Express Scripts Inc. Walgreen recently had ended its $5.3-billion-per-year relationship
with Express Scripts Inc. because, according to Walgreens, Express Scripts was not paying it enough
money to fill prescriptions. Walgreens also complained that Express Scripts was trying to dictate terms of
the partnership. Pharmacy benefits managers, or PBMs, like Express Scripts pay Walgreen to fill
prescriptions. The PBMs make money by reducing the costs in prescription drug plans. Walgreen had a
similar contract fight last year with CVS Caremark Corp. that was eventually resolved. But the Express
Scripts conflict has intensified lately. Walgreens plans to stop filling prescriptions managed by Express
Scripts Inc. on January 1, 2011. Express Scripts is suing Walgreen.

In the fiscal fourth quarter, Walgreens earned $792 million, or 87 cents per share. That compares with net
income of $470 million, or 49 cents per share, in last year's quarter. Adjusted earnings were 57 cents per
share, and that topped Wall Street expectations. Walgreens’ revenue climbed more than 6 percent in the
fiscal 4th 2011 quarter to $17.97 billion. Sales at stores open at least a year rose 4.4 percent. That's a key
indicator of a retailer's long-term health because it excludes stores that recently opened or closed. For the
full fiscal year 2011, Walgreens earned $2.71 billion, or $2.94 per share, on $72.18 billion in revenue.

As part of a pilot program, Walgreens in October 2011 introduced a new pharmacy, health and wellness
experience at approximately 20 of its stores in the Chicago area, along with its stores in the Indianapolis
market. The new format is designed to meet the changing needs of customers while offering more quality,
cost-effective health care options. The new pilot program includes locating a pharmacist desk area in front
of the pharmacy counter to provide greater accessibility for consultation about medications and to provide
additional clinical services. The pilot program also include private or semi-private consultation rooms that
differentiate Walgreens from other drugstores and provide a customized environment for services such as
immunizations, blood pressure and blood glucose testing, and help with self-injectable medications.

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.