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  • 2014 Zacks Investment Research, All Rights reserved. www.Zacks.com

    111 North Canal Street, Chicago IL 60606

    Walgreen Co (WAG-NYSE) SUMMARY

    SUMMARY DATA

    Risk Level * Below Avg., Type of Stock Large-Blend Industry Retail-Drug Str Zacks Industry Rank * 40 out of 267

    Current Recommendation NEUTRAL

    Prior Recommendation Outperform Date of Last Change 03/13/2011

    Current Price (04/24/14) $67.42 Target Price $71.00

    Walgreens reported a mixed second quarter fiscal 2014 with adjusted earnings remaining below the Zacks Consensus Estimate while revenues exceeding the mark. As expected, Walgreens recorded improved revenues during the quarter on plump prescription sales. The company returned to sales growth with increasing return of Express Scripts customers following the resolution of their earlier impasse. However, sluggish front-end sales and difficult macroeconomic conditions remained looming concerns. Nonetheless, Walgreens gained a modest share in the retail pharmacy market. The higher first-year synergy from the Alliance Boots deal was another upside. We are also upbeat about the long-term three-pronged-deal with AmerisourceBergen. However, Walgreens strategy to win back earlier clients is still to be proven. The competitive landscape also remains tough. Accordingly, we remain Neutral on Walgreens.

    52-Week High $69.09 52-Week Low $44.12 One-Year Return (%) 37.52 Beta 1.34 Average Daily Volume (sh) 6,221,896

    Shares Outstanding (mil) 950 Market Capitalization ($mil) $64,061 Short Interest Ratio (days) 3.55 Institutional Ownership (%) 65 Insider Ownership (%) 8

    Annual Cash Dividend $1.26 Dividend Yield (%) 1.87

    5-Yr. Historical Growth Rates

    Sales (%) 3.2 Earnings Per Share (%) 10.2 Dividend (%) 24.2

    P/E using TTM EPS 21.0

    P/E using 2014 Estimate 19.5 P/E using 2015 Estimate 17.3

    Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page

    ZACKS CONSENSUS ESTIMATES

    Revenue Estimates (In millions of $)

    Q1 Q2 Q3 Q4 Year (Nov) (Feb) (May) (Aug) (Aug)

    2012 18,157 A 18,651 A 17,752 A 17,073 A 71,633 A 2013 17,316 A 18,647 A 18,313 A 17,941 A 72,217 A 2014 18,329 A 19,605 A 19,210 E 18,787 E 75,895 E 2015 19,107 E 20,310 E 80,526 E

    Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses)

    Q1 Q2 Q3 Q4 Year (Nov) (Feb) (May) (Aug) (Aug)

    2012

    $0.63 A $0.78 A $0.62 A $0.48 A $2.53 A 2013

    $0.58 A $0.96 A $0.85 A $0.73 A $3.12 A 2014

    $0.72 A $0.91 A $0.94 E $0.88 E $3.45 E 2015

    $0.85 E $1.04 E $3.90 E Note: Quarterly figures may not add up to the annual figure due to rounding off Projected EPS Growth - Next 5 Years % 12

    April 25, 2014

  • Equity Research WAG | Page 2

    OVERVIEW

    Headquartered in Deerfield, Ill., Walgreen Co. (WAG), popularly known as Walgreens, is the largest national retail pharmacy chain in terms of revenue and profitability. As of Nov 30, 2013, Walgreens operated 8,681 locations in all 50 states, the District of Columbia, Puerto Rico and Guam and the U.S. Virgin Islands, including 8,200 drugstores (142 more compared with the year-ago period). The company also operates infusion and respiratory service facilities, worksite health and wellness centers, specialty pharmacies and mail service facilities. Its Take Care Health Systems subsidiary manages more than 750 in-store convenient care clinics and worksite health and wellness centers.

    The drugstores, apart from selling prescription drugs, also sell over-the-counter (OTC) medications, general merchandise, cosmetics, toiletries, household items and food and beverages. Due to carefully selected locations, the stores offer easy accessibility with many of them remaining open for 24 hours. The company ensures robust traffic in the stores by offering a broad selection of consumable merchandise backed by strong advertising programs.

    In Aug 2012, Walgreens entered into a strategic partnership with a global international pharmacy-led health and beauty group Alliance Boots GmbH, in which it acquired a 45% stake for $6.7 billion. The company also has the option to obtain 100% ownership over the next three years for an approximate value of $9.5 billion in cash and stock.

    Generic: The Current Scenario

    The ongoing introduction of prescription drugs in the generic market is changing the mode of patient care which affects the business of drug retailers like Walgreens. The generic wave hampered Walgreens top-line in the past quarters. However, gross margin improved on account of higher generic prescription drug sales. While the introduction of generics has notably dragged sales over the last few quarters, the company expects the gross margin expansion to continue in the near term. Management asserted that the generic wave should significantly increase Walgreens gross profit per script compared to the gross margin which it earns on brands.

    REASONS TO BUY

    Prescription Drug Purchasing Front-Runner: Walgreens in its most recent effort to boost its market presence, decided to focus on its supply chain performance. With this aim, on Mar 18, 2013, the company along with Alliance Boots GmbH and AmerisourceBergen Corporation had announced various agreements and arrangements. It inked a 10-year pharmaceutical distribution agreement with AmerisourceBergen, effective Sep 1, 2013, to improve its global pharmaceutical supply chain for branded as well as generic drugs. AmerisourceBergen has replaced Walgreens former pharmaceutical distributor Cardinal Health as Walgreens contract with the latter had expired in Aug 2013. Earlier, AmerisourceBergen used to supply specialty drugs to Walgreens. The company s three-pronged deal with AmerisourceBergen underlines a strategic collaboration, equity alignment and distribution agreement. Apart from that, Walgreens entered into an agreement which provides AmerisourceBergen the ability to access generics and related pharmaceutical products through Walgreens Boots Alliance Development GmbH, a global sourcing joint venture between Walgreens and Alliance Boots. While Walgreens is riding the generic wave, the deal augments its buying capacity by a massive $3.5 billion. In calendar year 2014, AmerisourceBergen is expected to distribute substantial levels of generic pharmaceutical products that are currently distributed by Walgreens. At present, Walgreens is a step closer to exercising its right to purchase a minority stake in AmerisourceBergen following the regulatory clearance. As of Feb 25, the company purchased 10.5 million shares of AmerisourceBergen s stock and owned 4.5% of the company. Although the equity alignment is exercisable up to 23%, Walgreens can obtain a maximum of 30% stake (maximum limit per agreement) in AmerisourceBergen if the latter continues its share buyback activity. According to the company, the levels of generic pharmaceuticals distributed by AmerisourceBergen will increase throughout 2014. We believe, the contract between these three behemoths in their respective industries will build an incomparable global

  • Equity Research WAG | Page 3

    platform in the retail or wholesale pharmacy industry. This will create a kingpin in the prescription drug purchasing space helping Walgreens to better serve the U.S. and European healthcare systems along with other growing markets globally. Walgreens is optimistic about the financial and operational benefits from the AmerisourceBergen deal for fiscal 2014 with margin expansion and bottom-line accretion.

    New Alignments to Boost Growth:

    In Mar 2014, Walgreens formed collaboration with Lebhar-Friedman Publishing to launch Discover Beauty Within, the first exclusive, beauty publication for mass retailer. The publication is focused on providing Walgreens and Duane Reade store customers with timely editorial content and valuable coupons on behalf of the retailers merchandising partners. In Jan 2014, Walgreens entered into a clinical collaboration agreement with Centura Health, a leading health care network in the U.S. to provide greater access to healthcare services. With the Affordable Care Act bringing millions of newly insured patients into the health care system, the relationship aims to help address some of the needs and challenges faced by both patients and caregivers. In September, Walgreens entered into a long-term partnership with Theranos, Inc., under which the new lab testing service of the latter will be available throughout the wide network of Walgreens pharmacies. As the largest retail pharmacy chain in the U.S. with more than 8,100 neighborhood pharmacies, Walgreens is expected to bring Theranos service to consumers nationwide. This service is currently available at Walgreens Palo Alto, California store. However, the company has plans to expand later this year. In Oct 2013, Walgreens also entered into a clinical collaboration with WellStar s Health System. As per the deal, the two companies will jointly provide coordinated and expanded health care services, while improving access to enhanced, inexpensive care for patients in the northwest Atlanta market. With the Affordable Care Act facilitating the entry of millions of new patients into the healthcare system, the merger is expected to be beneficial for Walgreens going ahead. It addresses the needs and challenges facing both patients and healthcare providers. These recent endeavors are expected to create a competitive edge for the company in the fast-growing pharmacy retailing market.

    Strong Focus on Immunization Market:

    Walgreens continues to strive to expand in the high-growth immunization market. It is currently the largest retail provider of flu immunizations

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