Fall 08 Walgreens: Financial Analysis and Recommendations By Madeleine Robinson A thesis submitted to the faculty of The University of Mississippi in partial fulfillment of the requirements of the Sally McDonnell Barksdale Honors College. Oxford May 2016 Approved by Advisor: Professor Victoria Dickinson © 2015 Madeleine Robinson ALL RIGHTS RESERVED ii ABSTRACT Madeleine Robinson: Walgreens: Financial Analysis and Recommendations (Under the direction of Victoria Dickinson) This thesis is an analysis including recommendations for the publically traded company, Walgreens. By using the most recent 10-K filing, a complete financial analysis was completed. Through the findings it was recommended to Walgreens that they focus more on mobile growth to compete with technology of competitors, as well as bring an in store area to represent their mobile presence. iii Table of Contents Introduction ................................................................................................................. 1 Chapter 1: General Company Information .................................................................... 2 The History of Walgreens ....................................................................................................................................... 2 The Beginnings ........................................................................................................................................................... 2 The Great Depression and Recovery ................................................................................................................ 3 World War II and Effects ........................................................................................................................................ 5 1950’s-1990’s .............................................................................................................................................................. 5 1990’s to the Present ............................................................................................................................................... 8 Walgreens’s Operations ....................................................................................................................................... 10 Core Business ........................................................................................................................................................... 10 Manufacturing Centers and Corporate Headquarters .......................................................................... 11 Value Chain ................................................................................................................................................................ 12 Board of Directors ................................................................................................................................................... 12 Chapter 2: Industry and Strategic Analyses ................................................................ 14 Walgreens’s Mission and Strategy ................................................................................................................... 14 Strategic Position in the Market and Competition .................................................................................... 16 Porter’s Five Forces ................................................................................................................................................ 18 Walgreens’s SWOT Analysis ............................................................................................................................... 19 Chapter 3: Financial Statement Analysis Part 1 ........................................................... 21 Asset Composition .................................................................................................................................................. 22 Walgreens’s Financing .......................................................................................................................................... 22 Cash Flows and Financial Health ...................................................................................................................... 22 Liquidity and Solvency .......................................................................................................................................... 23 Earnings Per Share ................................................................................................................................................. 24 Chapter 4: Financial Statement Analysis Part 2 ........................................................... 25 Receivables ................................................................................................................................................................ 25 Inventories ................................................................................................................................................................. 27 Property Plant and Equipment ......................................................................................................................... 30 Chapter 5: Financial Statement Analysis Part 3 ........................................................... 33 Walgreens’s Recent Investments ..................................................................................................................... 33 Restructuring Charges in Past Five Years ..................................................................................................... 35 Foreign Currency Changes ................................................................................................................................. 35 Stock Repurchases and Splits by Walgreens ............................................................................................... 36 Dividends ................................................................................................................................................................... 36 Pension Expense ..................................................................................................................................................... 37 iv Chapter 6: Financial Statement Analysis Part 4 ........................................................... 39 Operating Versus Non-Operating Items ........................................................................................................ 39 Effective Tax Rate .................................................................................................................................................... 41 Financial Analysis ................................................................................................................................................... 42 Limitations of Ratios .............................................................................................................................................. 49 Chapter 7: Accounting Quality .................................................................................... 50 Lagging Economic Indicators ............................................................................................................................ 50 Leading Economic Indicators ........................................................................................................................... 52 Effects of New Revenue Recognition Standard .......................................................................................... 53 Forecast Targets ..................................................................................................................................................... 53 Earnings Management ......................................................................................................................................... 53 Chapter 8: Equity Valuation ....................................................................................... 55 Capitalizing Leases ................................................................................................................................................ 55 Weighted Average Cost of Capital ................................................................................................................... 57 Forecast of Growth ................................................................................................................................................ 58 Stock Valuation ........................................................................................................................................................ 58 Chapter 9: Audit and Tax Recommendations .............................................................. 61 Management’s Assertions and Effects on Accounts ................................................................................ 63 Audit Risks and Internal Controls ................................................................................................................... 63 Tax Issues .................................................................................................................................................................. 64 Chapter 10: Audit and Tax Recommendations ............................................................ 67 Focus on Mobile Growth ..................................................................................................................................... 67 Corner of Healthy and Happy ..........................................................................................................................