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walgreen Lehman Brothers Eleventh Annual Retail and

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  • 1. Confidential Lehman Brothers Retail and Restaurant Conference Bill Rudolphsen, Chief Financial Officer April 30, 2008 New York © Copyright 2008 Walgreen Co.
  • 2. Confidential Safe Harbor • Certain statements and projections of future results made in this presentation constitute forward-looking information that is based on current market, competitive and regulatory expectations that involve risk and uncertainty. • Please see our Form 10-K for a discussion of factors as they relate to forward-looking statements dated August 31, 2007. 2 © Copyright 2008 Walgreen Co.
  • 3. Confidential Walgreens At a Glance The nation’s largest and fastest growing drugstore chain Solid track record: 33 years of record sales and earnings Highly respected brand and growing market share Highest sales and earnings per square foot among peers Strong cost discipline and best in class execution Focused on driving sales and improving returns 3 © Copyright 2008 Walgreen Co.
  • 4. Confidential Best Corners In America 4 © Copyright 2008 Walgreen Co.
  • 5. Confidential Growing Market Leadership #1 in Market Share in 138 Major Markets 23 110 2 10 1 116 2 206 13 52 25 ID 139 8 199 134 61 89 52 22 536 185 64 229 73 133 31 3 107 170 58 62 79 74 495 Number of 220 122 42 stores 90 55 47 235 72 200+ 76 54 143 150-200 Washington D.C. 1 603 119 100-150 751 50-100 Hawaii 1 1-50 Puerto Rico 6,271 Retail Locations 74 5 © Copyright 2008 Walgreen Co.
  • 6. Confidential Consistent Growth Record In Billions 2007 Net Sales $53.8 Billion $60 15% CAGR $50 $40 $30 $20 $10 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 6 © Copyright 2008 Walgreen Co.
  • 7. Confidential Growing Market Coverage Percent of Total Retail Pharmacies WAG WAG 6.5% 9.8% Independents Independents Chains w/o WAG 30.7% Chains w/o WAG 37.1% 30.4% 28.6% 13.1% 17.8% 10.6% 15.3% Mass Mass Supermarkets Supermarkets 2001 2006 55,581 Total Stores 56,948 Total Stores 7 Source: NACDS © Copyright 2008 Walgreen Co.
  • 8. Confidential New Stores Deliver Growing Sales Returns Improve as they Mature Average Front-End Sales/Store by Class Year (000’s) 57% improvement 9.5% $3,500 from year 1 to 5 $3,192 $2,988 7.7% $3,000 ars $2,738 Ye $2,453 rs $2,500 a 39.0% 0-1 Ye 6.9% 2 $2,037 1- ears 10+ Years 2-3 Y $2,000 3-4 Ye ars 6.3% 4-5 $1,500 Ye ars $1,000 5.6% 5-10 Years $500 25.0% $0 36% of stores are less than 5 years old Year Year Year Year Year 1 2 3 4 5 8 Note: Data based on net new drugstores, excluding acquired stores and stores converting to or from 24- © Copyright 2008 Walgreen Co. hour format. Class Year is calculated on a Calendar Year basis; includes only stores open at least 12 months as of 12/31/2007. See appendix for details.
  • 9. Confidential Improving ROIC Return on Invested Capital 11.0% 10.5% 10.5% 10.0% 10.0% 10.0% 9.7% 9.6% 9.5% 9.0% 8.5% 2003 2004 2005 2006 2007 Source of methodology: McKinsey & Company, Inc. & Copeland, T., et. al. (2000). Valuation: 9 Measuring and Managing the Value of Companies. New York: Wiley. See appendix. © Copyright 2008 Walgreen Co.
  • 10. Confidential Outpacing Other Retail Pharmacies Total Same-Store Sales By Month 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% 7 7 7 7 07 7 08 7 7 07 7 08 8 -0 -0 -0 -0 l-0 -0 -0 -0 -0 p- n- n- b- ov ct pr ug ec ay ar ar Ju Se Ja Ju Fe O A M M N D M A Walgreens CVS Rite Aid Longs Source: Morgan Stanley Research 10 Note: CVS stopped releasing © Copyright 2008 Walgreen Co. monthly data beginning Feb. 2008
  • 11. Confidential Consistently Beating The Industry WAG Script Growth Spread Vs. Industry 8.0% 7.0% 6.0% 5.0% Total Retail Script Growth Spread 4.0% 3.0% 2.0% Comp Script Growth Spread 1.0% 0.0% N7 N6 D7 D6 M 07 Se 7 O7 Ja 7 O6 Ja 6 Fe 8 Fe 7 Ju 7 M8 8 M7 A7 Ju 7 A7 -0 -0 -0 -0 -0 l-0 0 -0 0 -0 0 0 -0 0 -0 0 -0 0 - p- p- n- n- b- b- n- ov ov ct ct ug pr ec ec ay ar ar Se WAG Total Retail Script Growth minus IMS w/o WAG WAG Comp Script Growth minus IMS w/o WAG 11 © Copyright 2008 Walgreen Co. Source: Company & IMS Data
  • 12. Confidential Outperforming Other Retailers 2007 EBIT per Selling Square Foot* $60 $50 $40 $30 $20 $10 $0 Food Chain w/o Wal-Mart WAG WAG * Source: Company Data 12 © Copyright 2008 Walgreen Co.
  • 13. Confidential Disciplined Cost Management Year-Over-Year % Increase 25.0% 20.0% Gross Profit 15.0% SG&A 10.0% 5.0% 0.0% 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 13 Note: SG&A data adjusted for Hurricane Katrina © Copyright 2008 Walgreen Co. Source: Company Data
  • 14. Confidential New Offerings Drive Customer Traffic 14 © Copyright 2008 Walgreen Co.
  • 15. Confidential Growing Private Brand Business 15 © Copyright 2008 Walgreen Co.
  • 16. Confidential Generic Conversions • Benefit the patients • Benefit the payors • Benefit Walgreens • Have a significant impact on year-over-year changes in prescription sales • Increase gross profit dollars and the bottom line 16 © Copyright 2008 Walgreen Co.
  • 17. Confidential Prescription Savings Club Card • Walgreens Prescription Savings Club drives traffic and attracts new customers • Walgreens offers discounts on more than 5,000 drugs, including a three month supply of more than 300 generics for only $12.99 • 10% rebate on Walgreen Brand products 17 © Copyright 2008 Walgreen Co.
  • 18. Confidential Leveraging Our Strong Brand to Establish… 18 © Copyright 2008 Walgreen Co.
  • 19. Confidential Multiple Growth Platforms Store Health & Pharmacy Wellness Retail Sales Medical Specialty Campus Pharmacy 19 © Copyright 2008 Walgreen Co.
  • 20. Confidential Specialty Pharmacy: A Large & Growing Market Opportunity • Total annual market potential today of $60 billion, expected to grow to $100 billion by 2010 • Average specialty drug spend > $6,000 per year • Representing nearly one- quarter of total drug spending in the U.S. • Increase in FDA approvals of biotech medication 20 © Copyright 2008 Walgreen Co.
  • 21. Confidential An Emerging Leader in Specialty Pharmacy • #1 in home infusion, #4 in specialty pharmacy services • Exclusive multi-year specialty pharmacy contract for 10 Blue Cross Blue Shield plans provides access to over 20 million members • Opportunity to expand services beyond specialty pharmacy • Independence is significant factor in winning new contracts 21 © Copyright 2008 Walgreen Co.
  • 22. Confidential Extending Our Growth in Health & Wellness Take Care • In-store clinics treat routine health care needs and minor ailments • Patients can be seen quickly with no appointments necessary • 154 Take Care locations will grow to 400 by year end 2008 • Platform for additional services 22 © Copyright 2008 Walgreen Co.
  • 23. Confidential Worksite Clinics: A Significant and Growing Market Opportunity • 200-plus corporate clients • 350 corporate campus locations • Offering cost effective prescription drugs and health care services • Market: 7,600 corporate campuses of 1,000 employees or more + families and retirees; potential $20 billion plus industry 23 © Copyright 2008 Walgreen Co.
  • 24. Confidential Serving An Impressive Base of Corporations 24 © Copyright 2008 Walgreen Co.
  • 25. Confidential Medical Campuses: Serving the Patient at the Point of Care 25 © Copyright 2008 Walgreen Co.
  • 26. Confidential Additional Growth Drivers Older Americans Spend More • Aging population will $1,000 $887 drive growth for Rx and health care services $750 • Growing employer focus $612 on promoting health and wellness to enhance $500 productivity and reduce health care costs $268 $250 • Increased provider focus $97 on transparency $0 • Generic conversion cycle Under 25-45 45-65 Over rising 25 65 Drug Spend per Year 26 © Copyright 2008 Walgreen Co. Source: BLS
  • 27. Confidential Walgreens Strategy Retail and health care trends have created a more complex and competitive environment As the market leader in retail pharmacy we have tremendous assets to: • Broaden access through expanded footprints • Leverage the box to drive top and bottom line productivity • Expand into adjacent health care services to strengthen the core Our goal: • 10,000 points of care by 2012 • 8% annual square footage growth • 15% earnings CAGR • Significant value creation for shareholders 27 © Copyright 2008 Walgreen Co.
  • 28. Confidential Questions & Answers 28 © Copyright 2008 Walgreen Co.
  • 29. Confidential Lehman Brothers Retail and Restaurant Conference Bill Rudolphsen, Chief Financial Officer April 30, 2008 New York © Copyright 2008 Walgreen Co.
  • 30. Confidential Calculation of Adjusted SG&A 4Q04 4Q05 4Q06 ($s in millions) SGA$ under GAAP $ 2,102.1 $ 2,434.9 $ 2,732.4 Less: Katrina Expense $ - $ 54.7 $ - Adjusted SGA$ $ 2,102.1 $ 2,380.2 $ 2,732.4 Adjusted YOY % Increase 13.2% 14.8% 30 © Copyright 2008 Walgreen Co. 2007
  • 31. Confidential Improving ROIC 2003 2004 2005 2006 2007 NOPAT $1,465 $1,687 $1,938 $2,154 $2,514 Average Invested $15,221 $17,341 $19,412 $21,501 $23,896 Capital ROIC* 9.6% 9.7% 10.0% 10.0% 10.5% NOPAT = Net Operating Profit After Tax ROIC = Return on Average Invested Capital *Source of methodology: McKinsey & Company, Inc. & Copeland, T., et. al. (2000). Valuation: Measuring and Managing the Value of Companies. New York: Wiley. Source: Company Data 31 © Copyright 2008 Walgreen Co.
  • 32. Confidential Acquisitions Help Drive Growth 2008: • I-Trax (CHD Meridian and ProFitness Solutions) – worksite healthcare clinics • Whole Health Management – worksite healthcare clinics 2007: • Option Care - specialty pharmacy and home infusion services provider • Take Care Health Systems - a convenient care clinic provider • Familymeds Group (selected assets) • Senior Med (primarily prescription files) 2006: • Medmark Specialty Pharmacy • Canadian Valley Medical Solutions (home care services) • Happy Harry’s 2005: • Schraft’s Specialty Pharmacy • Home Pharmacy of CA • Selected assets from the 23-store Medic drugstore chain 32 © Copyright 2008 Walgreen Co.
  • 33. Confidential Our Specialized Services Specialty Pharmacy Home Infusion Services Allergic Asthma Anti-infectives (antibiotics, Anticoagulants antifungals, antivirals) Crohn's Disease Antiemetics Cystic Fibrosis Catheter Management Gaucher Disease Chemotherapy Growth Hormone - Adult Deferoxamine for iron storage diseases and iron toxicity Growth Hormone - Pediatric Enteral Nutrition Hemophilia Heart Failure Hepatitis C Hydration HIV Immune Globulin Infertility Infliximab (Remicade®) Multiple Sclerosis Therapies for Paget's Disease and Oncology diseases causing hypercalcemia Osteoporosis Pain Management Pulmonary Arterial Hypertension (PAH) Respiratory IV and Inhaled Primary Immune Deficiency Steroids Psoriasis Respiratory Syncytial Virus (RSV) Total Parenteral Nutrition (TPN) Prevention Rheumatoid Arthritis Transplant 33 © Copyright 2008 Walgreen Co.
  • 34. Confidential Take Care Clinic Services Respiratory Illnesses Skin Conditions Vaccinations Additional Treatments Acne Flu (Seasonal) Allergies – seasonal Bronchitis Athlete’s Foot GARDASIL®(HPV) Bladder Infections (female, Common Colds Cold Sores Hepatitis B ages 12-65) Coughs Dry Skin Menactra (Meningitis) Diarrhea, Nausea and Ear Infections Impetigo Shingles Vaccine Vomiting Itchy Skin Tdap (Tetanus, Early Lyme Disease Flu Diphtheria, Pertussis) Poison Ivy/Poison Fever (<72 Hours) Laryngitis Oak Td (Tetanus Booster) Head Lice Sinus Infections Rashes Mononucleosis Sore Throat/Strep Throat Diagnostic Testing Ringworm Pink Eye and Styes Blood Upper Respiratory Infections Scabies Scalp Rash Pressure/Hypertension Swimmer’s Ear Shingles Minor Injuries PPD/Tuberculosis Skin Infections Swimmer’s Itch Abrasions Pregnancy Sunburn Burns (minor) Tick/Insect Bites Splinters Wart Evaluation Sprains/Strains Staple/Suture Removal Physicals Camp Physicals Sports Physicals 34 © Copyright 2008 Walgreen Co.
  • 35. Confidential Second Quarter Financials Percentage Change Three Months Ended February 28 (29 in 2008) 2008 2007 2006 Net Sales 10.5% 14.6% 10.7% Net Earnings 5.2% 24.5% 6.6% *Comparable Drugstore Sales 4.7% 8.9% 6.5% *Comparable Front-End Sales 4.0% 5.7% 5.0% Prescription Sales 11.1% 16.4% 11.1% *Comparable Prescription Sales 5.2% 10.9% 7.4% *Comparable Prescriptions (Units) 3.6% 6.3% 3.5% Percent to Sales Three Months Ended February 28 (29 in 2008) 2008 2007 2006 Gross Margin 28.82% 28.96% 28.44% Selling, General and Administrative 21.75% 21.64% 21.69% Expenses *Comparable data excludes February 29th 35 © Copyright 2008 Walgreen Co.
  • 36. Confidential Front-End Sales Front-End Sales/Store by Class Year In Thousands Class Year 2006 $ 2,071 2005 $ 2,524 $ 2,062 2004 $ 2,761 $ 2,438 $ 2,023 2003 $ 3,041 $ 2,745 $ 2,431 $ 2,029 2002 $ 3,192 $ 2,933 $ 2,703 $ 2,414 $ 1,993 Average $ 3,192 $ 2,988 $ 2,738 $ 2,453 $ 2,037 Year 5 Year 4 Year 3 Year 2 Year 1 36 Note: Data based on net new drugstores, excluding acquired stores and stores converting to or from 24- © Copyright 2008 Walgreen Co. hour format. Class Year is calculated on a Calendar Year basis; includes only stores open at least 12 months as of 12/31/2007.
  • 37. Confidential Compelling Historic Valuation 60 50 40 30 20 10 0 07 01 03 05 93 95 97 99 87 89 91 20 20 20 20 19 19 19 19 19 19 19 High Px/Cash Flow Low Px/Cash Flow 37 © Copyright 2008 Walgreen Co.
  • 38. Confidential Compelling Historic Valuation 70 60 50 40 30 20 10 0 07 01 03 05 93 95 97 99 87 89 91 20 20 20 20 19 19 19 19 19 19 19 High P/E Ratio Low P/E Ratio 38 © Copyright 2008 Walgreen Co.