Walgreen Co.'s Competitive Strategies

WALGREEN CO.'S COMPETITIVE STRATEGIES:

Historically W. was differentiated it self from its competitors. It was a cost leader especially in non prescription products (ice cream, candy) and built consumer loyalty. And its built a very strong franchise in the medical prescriptions business.

The Internal Performance

??????

The profit margins for W. increased from 2.96% (1993) to 3.62%(2003). For retail drugstores industry decline from 2.78% to 2.39% .

W. experienced a positive trend in its operating and Net profit margins over the 10 years (1993-2003).

To predict future values; why retail drugstores industry decline and why W. have a strong positive performance.

Industry factors:

• Industry profit margins have declined due to price cutting by the majority of the sellers.

• the most sellers went to deal with more profitable items (cosmetics).

Company performance:

• The W.CO'S profit margins has shown improvement. Its due to a huge change in the corporate structure and sales Mix (the company occupied a strong position in the pharmacy business)

• The company improved an inventory control technology

?????????????????????????

As you show in exhibit before, a time series plot for Net profit margins for W. and retail drugstores industry from 1993 to 2003.

1- The firm's common-size income statement

????????

exhibit before shows the income statement of W. during 2001-2004.

cost of goods sold and selling ,occupancy and administrative expense:

• Cost of sales percentage decline from 73.30% (2001) to72.81% (2004) (small decrease around 1%)

• While there was a partially offsetting increase in the percentage of selling ,occupancy and administrative expense from 21.02% (2001) to 21.48% (2004) .

• The operating profit margins experienced a minimal increase from 5.68%(2001) to 5.71% (2004).

Net profit margins estimate:

Because of W.CO'S strong performance relative to its industry profit margins and a small increase in its margin.

so it is estimated that the firm will show a slight increase to 3.66% in 2005.

Computing Earning per Share (EPS):

EPS=Net Incomes/number of shares

As said before sales are estimated to be $42 b in 2005 N.Income to be $1537 m.

If we have for this firm 1030 m common shares .

So EPS at 2005 should be = 1537m÷ 1030m = $1.5 per share

EPS at 2004 = 1360÷1030=1.3 per share

In 2005 an increase of EPS = (1.5-1.32) /1.32 =14%

Importance of Quarterly Estimates:-

Estimating the next year's sales and Net earning is not enough .

Why have to estimate these (derive) each quarter year is very important ?

1- To confirm the annual estimate and for being sure.

2- To be in a normal position; we have not to be surprise at the end of the year.

Estimating Company Earning Multipliers:

We can use two approaches to do that:

First approaches:-

We estimate the P/E from the relationships between W.CO'S industry and the market . We call this approach the Macro Analysis.

second approach:-

We estimate the P/E based on:

• the dividend – payout ratio (P.O.R)

• The required rate of return (RRR or K)

• The growth rate (g)

The Macro Analysis of Earning Multiplier:

???????????

As shown in exhibit

The W.CO'S multiplier general followed the industry multiplier

-you will see:

1< company/industry ratio < 1.15

The W.CO'S P/E is higher than the market multiplier except during 2001-2002

??????

show the exhibit before and why the W.CO'S P/E is higher than the market and industry P/E?

- as we know to estimate the P/E we should estimate D/E, K and g (as P/E= D/E÷ (K-G))

1- The D/E for W.CO'S :

was lower than its industry in recent years. so the P/E will be lower (for the W.CO )

2- Estimating the RRR (K):

we need analyze the firm's risk (BR , FR , LR , ERR , CR).

And by knowing W's (the systematic risk ).

Also by using secure market line (SML):

-W.CO has low business risk due its stable sales growth compared to its industry and the market as whole.

-W.CO's EBIT experienced very stable growth which indicates lower BR.

-The W.CO's LR is quite low compared to its industry and the market.

The indicators of market liquidity are:

1- number of stock holders

2- market value