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walgreen Walgreen Co. First Quarter 2008 Earnings Conference

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  • 1. First Quarter 2008 Conference Call December 21, 2007 © Copyright 2007 Walgreen Co.
  • 2. First Quarter 2008 Agenda • Introduction/ Safe Harbor Rick Hans Director, Finance • First Quarter Highlights Jeff Rein Chairman, CEO • First Quarter Financial Results Bill Rudolphsen CFO • Operations Update Greg Wasson President, COO • Corporate Strategy Jeff Rein • Questions & Answers All 2 © Copyright 2007 Walgreen Co.
  • 3. 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 risks and uncertainties. • Please see our Form 10-K for the fiscal year ended August 31, 2007 for a discussion of factors as they relate to forward-looking statements. 3 © Copyright 2007 Walgreen Co.
  • 4. Highlights • Committed to greater transparency • Record sales and earnings • Disciplined expense controls • Continued solid organic expansion • Significantly reduced SG&A growth year-over-year • Long-term outlook: strong and improving sales and margins in second half of fiscal 2008 and beyond 4 © Copyright 2007 Walgreen Co.
  • 5. Financial Highlights Percentage Change Three Months Ended November 30 2005 2006 2007 Net Sales 10.2% 16.6% 10.4% Net Earnings 5.2% 24.9% 5.5% Comparable Drugstore Sales 7.2% 9.7% 5.4% Prescription Sales 10.3% 18.7% 11.1% Comparable Drugstore 7.7% 11.9% 5.9% Prescription Sales Front-End Sales 10.8% 12.6% 9.1% Comparable Front-End Sales 6.4% 5.8% 4.6% Percentage Change Three Months Ended November 30 2005 2006 2007 Gross Profit 10.9% 19.1% 9.3% SG&A 11.8% 18.0% 9.5% 5 © Copyright 2007 Walgreen Co.
  • 6. Slowing the Rate of SG&A Growth Year-Over-Year % Increase 25.0% 20.0% Gross Profit 15.0% SG&A 10.0% 5.0% 03 03 03 03 04 04 04 04 05 05 05 05 06 06 06 06 07 07 07 07 08 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q Note: SG&A data adjusted for the impact of Hurricane Katrina. 6 © Copyright 2007 Walgreen Co.
  • 7. Consistent Front-End Productivity Front-End Sales/Store by Class Year CLASS YEAR In Thousands $2,092 2006 $2,551 $2,076 2005 $2,748 $2,431 $2,030 2004 $3,015 $2,743 $2,411 $2,032 2003 $3,224 $2,958 $2,693 $2,422 $2,002 2002 Average $3,224 $2,985 $2,728 $2,452 $2,045 Year 5 Year 4 Year 3 Year 2 Year 1 Notes: Data based on net new drugstores, excluding acquired stores and stores converting to or from a 24-hour format Class Year is calculated on a Calendar Year basis; includes only stores open at least 12 months as of 10/1/2007 7 © Copyright 2007 Walgreen Co.
  • 8. Consistent Pharmacy Productivity Prescriptions/Day/Store by Class Year CLASS YEAR 125 2006 181 118 2005 213 177 121 2004 252 226 190 129 2003 266 243 218 184 124 2002 Average 266 247 219 183 123 Year 5 Year 4 Year 3 Year 2 Year 1 Notes: Data based on net new drugstores, excluding acquired stores and stores converting to or from a 24-hour format Class Year is calculated on a Calendar Year basis; includes only stores open at least 12 months as of 10/1/2007 8 © Copyright 2007 Walgreen Co.
  • 9. ROAIC Improving Dollars in Millions 2003 2004 2005 2006 2007 $1,465 $1,687 $1,938 $2,154 $2,514 NOPAT Average Invested $15,221 $17,341 $19,412 $21,501 $23,896 Capital 9.6% 9.7% 10.0% 10.0% 10.5% ROAIC* NOPAT = Net Operating Profit After Tax ROAIC = 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. 9 © Copyright 2007 Walgreen Co.
  • 10. Pharmacy/Specialty Update • More than 17% of U.S. Rx market today • Industry’s most productive and efficient operator • Significant generic introductions in 2009 and beyond • Specialty pharmaceuticals represents significant growth opportunity – Option Care progressing on plan • Expanding point-of-care retail distribution system offers sustainable competitive advantage 10 © Copyright 2007 Walgreen Co.
  • 11. Expanded Access to Health Care • Take Care Health: significant growth opportunity with 119 clinics currently – Cost-effective, differentiated and leverages broad retail presence • Non-traditional venues: brand extension and concept growth opportunities – major medical centers, clinics and corporate campuses 11 © Copyright 2007 Walgreen Co.
  • 12. Our Corporate Strategy • Growing market leadership to strengthen our competitive position – Aggressive organic store expansion – Health care and front-end service extensions – Opportunistic value-creating acquisitions • Invest for attractive returns • Deliver sustainable long-term shareholder value 12 © Copyright 2007 Walgreen Co.
  • 13. Positioned to Deliver Shareholder Value • Scale: locations, buying power, service • Independence • Platform growth – Units and square footage – Geographic expansion in most attractive markets – Acquisition of independents • Strong balance sheet – Target of debt/total capital ratio of 50% – Provides ability to be opportunistic, flexible in pursuing growth 13 © Copyright 2007 Walgreen Co.
  • 14. Questions & Answers 14 © Copyright 2007 Walgreen Co.
  • 15. 15 © Copyright 2007 Walgreen Co.
  • 16. Appendix 16 © Copyright 2007 Walgreen Co.
  • 17. Calculation of Adjusted SG&A 4Q04 4Q05 4Q06 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% 17 © Copyright 2007 Walgreen Co.
  • 18. Calculation of ROAIC and Reconciliation of NOPAT to Operating Income FY02 FY03 FY04 FY05 FY06 FY07 Operating Income $ 1,861 $ 2,142 $ 2,424 $ 2,702 $ 3,151 + Implied Interest Expense of Lease Payment1 2 $ 493 $ 557 $ 627 $ 687 $ 777 = Adjusted Operating Income $ 2,354 $ 2,699 $ 3,051 $ 3,389 $ 3,928 x Tax Rate 37.75% 37.50% 36.49% 36.44% 35.99% + Taxes on Adjusted Operating Income $ (889) $ (1,012) $ (1,113) $ (1,235) $ (1,414) = NOPAT $ 1,465 $ 1,687 $ 1,938 $ 2,154 $ 2,514 Invested Capital - OPERATING APPROACH Current Assets: $ 5,167 $ 6,609 $ 7,764 $ 8,317 $ 9,705 $ 9,510 + LIFO Reserve $ 694 $ 730 $ 736 $ 804 $ 900 $ 969 - Current Liabilities: $ 2,955 $ 3,671 $ 4,078 $ 4,481 $ 5,755 $ 6,744 = Adjusted Operating Working Capital: $ 2,905 $ 3,667 $ 4,423 $ 4,640 $ 4,850 $ 3,735 + Net Fixed Assets (PPE): $ 4,591 $ 4,940 $ 5,446 $ 6,165 $ 6,949 $ 8,200 + Net Other Assets3: $ (504) $ (579) $ (719) $ (870) $ (642) $ 296 $ 1,027 $ 1,161 $ 1,307 $ 1,432 $ 1,619 Rent Expense $ 900 $ 8,219 $ 9,284 $ 10,455 $ 11,455 $ 12,949 $ 7,203 + Implied Principal Amount of Leases4: $ 7,203 $ 8,219 $ 9,284 $ 10,455 $ 11,455 $ 12,949 = Total Invested Capital $ 14,195 $ 16,247 $ 18,434 $ 20,390 $ 22,612 $ 25,180 Average Invested Capital $ 15,221 $ 17,341 $ 19,412 $ 21,501 $ 23,896 Return on Average Invested Capital 5 9.6% 9.7% 10.0% 10.0% 10.5% Invested Capital - FINANCING APPROACH Shareholders' Equity $ 6,163 $ 7,118 $ 8,140 $ 8,890 $ 10,116 $ 11,104 + LIFO Reserve $ 694 $ 730 $ 736 $ 804 $ 900 $ 969 + Deferred Income Taxes $ 136 $ 181 $ 274 $ 240 $ 141 $ 158 = Adjusted Equity: $ 6,992 $ 8,028 $ 9,150 $ 9,934 $ 11,156 $ 12,231 + Implied Principal Amount of Leases4: $ 7,203 $ 8,219 $ 9,284 $ 10,455 $ 11,455 $ 12,949 = Total Invested Capital $ 14,195 $ 16,247 $ 18,434 $ 20,390 $ 22,612 $ 25,180 Average Invested Capital $ 15,221 $ 17,341 $ 19,412 $ 21,501 $ 23,896 Return on Average Invested Capital 5 9.6% 9.7% 10.0% 10.0% 10.5% 1. Marginal Cost of Debt = 6.0% 2. Implied Interest Expense Portion of Lease Payment = Marginal Cost of Debt * Implied Principal Amount of Leases 16 3. Net Other Assets = Goodwill + Other Non-Current Assets - Other Non-Current Liabilities 18 © Copyright 2007 Walgreen Co. 4. Implied Principal Amount of Leases = 8 x Rent Expense 5. ROAIC = NOPAT/Average Invested Capital
  • 19. 19 © Copyright 2007 Walgreen Co.

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