NYSE: WAGApril 29th, 2014

Leiyi (Sally) Huang

Qun (Jett) Yu

Siyang (Sylvia) Zhang

Agenda• Introduction • Business Overview• Stock Performance• Financial Ratio Analysis• Valuation • Recommendation

Current Position• 500 shares bought on Oct 6, 1999 @ $25.00• Current Stock Price: $67.72 (April 25th 2014)• Last Action: Sold 200 out of 500 shares in our portfolio• Unrealized annual rate of return : 7.08%

Company Overview

• Pharmacies & Drug Store • Market Capitalization:

$63.61 billion 63%10%

27%

Prescription Drugs

Non-Prescription Drugs

General Mechandise

Industry Overview

• Major Players: CVS Caremark, Rite Aid Corp

• Macroeconomic Forces:Per capita disposable incomePopulation agingHealth care reformUnemployment rate

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

0

20000

40000

Per Capita Disposable Income

Year

1900 1920 1940 1960 1980 2000 2012 2020 2040 20600

20

40

60

80

100

3.1 4.9 9 16.625.5

3543.1

56

79.792

Number of Persons 65+ (in mil-lions)

Year (as of July 1)

Source from administration of aging, IBIS World Business

Porter’s Five Forces

• Medium• Industry concentration raises barriers• Capital requirement is low

Threats of new entrants

• High• On the basis of price, selection, convenience and the quality of

customer services

Intensity of industry rivalry

• Low• General merchandise goods

Threats of Substitutes

• Medium• Supply agreement largely influence the profitability and

competitiveness of drug stores

Bargaining power of Suppliers

• High• Reimbursement rate by third parties

Bargaining power of Customers

Strategic Alliance w. Alliance Boots

• Currently 45% ownership in Alliance BootsEntry and expansion to European MarketFull combination option available in 2015

Strategic Alliance w. Amerisource Bergen

10-year pharmaceutical supply agreementAB act as the primary wholesale distribution source All the branded prescription drug and significant portion of

generic drug business transitioned to AB

SWOT Analysis

• Pricing pressure from the Pharmacy Benefit Management side

• Uncertainty about economic conditions outside U.S

• Acquisitions on drugstore chains bring growth potentials

• International Expansion potentials

• High degree of operating leases

• Shortage of backup supply sources and self-contribution capacity

• Advantageous store locations

• Brand Recognition• Experienced staff• Well established

customer royalty program

Strengths Weaknesses

ThreatsOpportunities

Stock Performance

Ratio Analysis

2010 2011 2012 2013Current Ratio 1.60 1.52 1.23 1.34 Quick Ratio 0.61 0.53 0.43 0.57 Cash Ratio 0.25 0.19 0.15 0.24

2010 2011 2012 2013Operating Profit Margin 5.13% 6.05% 4.84% 5.46%Net Margin 3.10% 3.76% 2.97% 3.39%ROA 8.13% 10.10% 6.98% 7.11%ROE (Book Value) 14.53% 18.56% 12.86% 13.00%

2010 2011 2012 2013Debt/Assets 0.09 0.09 0.16 0.14 Debt/Equity 0.17 0.16 0.30 0.26 Interest Coverage 40.68 61.48 39.36 23.88

Liquidity Ratios

Profitability Ratios

Solvency Ratios

Ratio Analysis2010 2011 2012 2013

A/R Turnover 27.26 29.18 30.72 30.10 Days Sales Outstanding 13.39 12.51 11.88 12.13 A/P Turnover 10.89 11.00 11.16 11.33 Days Payable Outstanding 33.50 33.17 32.71 32.21 Fixed Asset Turnover 6.13 6.36 6.08 5.97 Total Asset Turnover 2.62 2.69 2.35 2.09

2010 2011 2012 2013Tax Burden 61.99% 63.20% 63.00% 62.90%Interest Burden 97.54% 98.37% 97.46% 98.86%Operating Profit Margin 5.13% 6.05% 4.84% 5.46%Asset Turnover 2.62 2.69 2.35 2.09 Leverage 1.79 1.84 1.84 1.83 ROE 14.53% 18.56% 12.86% 13.00%

Activity Ratios

DuPont Analysis

2011 2012 2013EBIT/Tangible Asset 18.48% 15.37% 16.60%EBIT/EV 10.88% 11.50% 7.96%

Greenblatt Analysis

Comparable Companies

Comparable Company Analysis

Multiple Weight

Implied WAG Stock Price

Price/Book Value 25% 66.07$ Forward TEV/Sales 25% 70.17$ Forward TEV/EBITDA 25% 46.76$ Forward P/E 25% 61.84$

Implied WAG Stock Price 61.21$

Multiple WAG Statistic Low Median High Mean Low Median High MeanPrice/Book Value 21.78$ 1.70x 2.30x 5.10x 3.03x 37.03$ 50.09$ 111.08$ 66.07$ Forward TEV/Sales 74,383.51$ 0.47x 0.66x 1.81x 0.90x 33.83$ 51.18$ 141.41$ 70.17$ Forward TEV/EBITDA 5,022.79$ 8.46x 8.98x 9.12x 8.88x 41.44$ 47.26$ 48.01$ 46.76$ Forward P/E 3.70$ 13.83x 17.21x 18.61x 16.71x 51.19$ 63.67$ 68.84$ 61.84$

Multiple Statistics Implied WAG Share Price

WACC Calculation

Cost of debtCost of debt 2.7%Marginal tax rate 37.5%

Cost of debt after tax shield 1.7%

Cost of equityRisk-Free Rate (rf) 2.7%Market Risk Premium (rm-rf) 7.0%CAPM 5 year Beta 0.74

CAPM Cost of Equity 7.9% WAG Realized Return 26.5% Cost of Equity 9.7%

Capital Structure Debt 7.4% Market Cap 92.6% Total 100.0%

Weighted average cost of capital 9.1%Business risk premium 1.0%

Discount Rate 10.1%

WACC

Discounted Cash Flow Analysis

FCF Build - WAG +45% Alliance Boots 2014 2015 2016 2017 2018Net Income 2982.0 3239.8 3505.1 3862.6 4233.0Less: Capex (1,400.0) (1,212.4) (1,442.8) (1,500.5) (1,560.5)

Less: Change in NWC (212.1) (354.3) (270.8) (227.4) (236.5) Plus: D&A 1,293.7 1,305.0 1,295.1 1,310.9 1,331.1

Unleveled FCF $2663.6 $2978.1 $3086.7 $3445.5 $3767.0

FCF Build - WAG + 100% Alliance Boots 2014 2015 2016 2017 2018Net Income 2982.0 3934.7 4283.1 4675.1 5067.8

Less: Capex (1,400.00) (1,700.00) (2,000.00) (1,500.47) (1,560.49) Less: Change in NWC (212.11) (354.28) (270.77) (227.45) (236.54)

Plus: D&A 1,293.66 1,304.99 1,295.12 1,310.86 1,331.07 Unleveled FCF $2663.6 $3185.4 $3307.4 $4258.0 $4601.9

2009A 2010A 2011A 2012A 2013A 2014P 2015P 2016P 2017P 2018PSales Growth % 6.4% 7.1% -0.8% 0.8% 4.6% 7.0% 5.0% 4.0% 4.0%Gross Margin % 27.8% 28.1% 28.4% 28.4% 29.2% 28.5% 28.4% 29.2% 29.3% 29.5%SG&A Margin (%) 22.7% 23.0% 22.9% 23.6% 24.3% 23.2% 23.0% 23.5% 23.2% 23.0%Capex 1,927.0 1,014.0 1,213.0 1,550.0 1,212.0 1,400.0 1,212.4 1,442.8 1,500.5 1,560.5 Change in NWC ($) - 266.0 488.0 (912.0) 30.0 212.1 354.3 270.8 227.4 236.5 D&A ($) 975.0 1,030.0 1,086.0 1,166.0 1,283.0 1,293.7 1,305.0 1,295.1 1,310.9 1,331.1 Tax Rate 36.6% 38.0% 36.8% 37.0% 37.1% 37.1% 37.1% 37.5% 37.5% 37.5%

Years Ended August 31 Forecast

Assumption

Discounted Cash Flow Analysis

PV of Terminal Enterprise Net Equity Shares $ /FCFs Value Value Debt Value outstanding Share

Option not exercised 11846.6 33478.3 45325.0 6024.6 39300.4 954.331 41.18

Option exercised 13249.5 40898.0 54147.5 10796.6 43350.9 954.331 45.43

Present Value of Cash FlowsPerpetuity Growth Rate 3.0%

Option not exercised 2,663.6 2,978.1 3,086.7 3,445.5 3,767.0 54,281.0 Option exercised 2,663.6 3,185.4 3,307.4 4,258.0 4,601.9 66,311.0

Discounted rate 10.15% 10.15% 10.15% 10.15% 10.15% 10.15%

Discounted period (t) 1.00 2.00 3.00 4.00 5.00 5.00

Discount Factor 0.91 0.82 0.75 0.68 0.62 0.62

PV of FCFs

Option not exercised 2,418.2 2,454.6 2,309.8 2,340.7 2,323.3 33,478.3

% of EV 5.3% 5.4% 5.1% 5.2% 5.1% 73.9%

Option exercised 2,418.2 2,625.5 2,474.9 2,892.7 2,838.3 40,898.0

% of EV 4.5% 4.8% 4.6% 5.3% 5.2% 75.5%

Sensitivity Table

Option not exercised41.18 2.0% 2.5% 3.0% 3.5% 4.0%

8% 51.07 55.22 60.18 66.21 73.709% 42.80 45.73 49.13 53.14 57.92

10% 36.58 38.73 41.18 44.00 47.2811% 31.72 33.35 35.19 37.26 39.6312% 27.82 29.10 30.51 32.09 33.86

Option exercised45.43 2.0% 2.5% 3.0% 3.5% 4.0%

8% 57.46 62.53 68.60 75.96 85.109% 47.39 50.96 55.12 60.01 65.85

10% 39.80 42.43 45.43 48.87 52.8811% 33.89 35.88 38.12 40.66 43.5512% 29.15 30.70 32.43 34.36 36.52

Perpetuity Growth Rate

Discounted rate

Perpetuity Growth Rate

Discounted rate

Sensitivity Analysis

Implied Price

DCF $ 41.18 50%

Comparable Analysis $ 61.21 50%

Implied Price $ 51.20 100%

Recommendation

• Sell 200 shares at market• 500 shares bought on Oct 6, 1999 @ $25.00• Current Stock Price: $67.72 (April 25th 2014)

• Gain: $8544

Sell