Walgreens 2008 Annual Report Download - page 20

Management’s Discussion and Analysis of Results of Operations
and Financial Condition
Operating Statistics
Percentage Increases
Fiscal Year 2008 2007 2006
Net Sales 9.8 13.4 12.3
Net Earnings 5.7 16.6 12.3
Comparable Drugstore Sales 4.0 8.1 7.7
Prescription Sales 9.7 14.7 13.3
Comparable Drugstore Prescription Sales 3.9 9.5 9.2
Front-End Sales 10.0 12.2 10.9
Comparable Drugstore Front-End Sales 4.2 5.8 5.3
Gross Profit 9.2 15.8 11.7
Selling, General and Administrative Expenses 9.2 15.5 11.8
Percent to Net Sales
Fiscal Year 2008 2007 2006
Gross Margin 28.2 28.4 27.8
Selling, General and Administrative Expenses 22.4 22.5 22.1
Other Statistics
Fiscal Year 2008 2007 2006
Prescription Sales as a % of Net Sales 64.9 65.0 64.3
Third Party Sales as a % of Total
Prescription Sales 95.3 94.8 93.1
Total Number of Prescriptions (In millions) 617 583 530
Total Number of Locations 6,934 5,997 5,461
Results of Operations
Fiscal year 2008 net earnings increased 5.7% to $2,157 million, or $2.17 per
share (diluted), versus last year’s earnings of $2,041 million, or $2.03 per share
(diluted). The net earnings increase resulted from improved sales, which were
partially offset by lower gross margins and higher interest expense. The current
year was also benefited by a positive adjustment of $79 million, which corrected
for historically over-accruing the company’s vacation liability.
Net sales increased by 9.8% to $59,034 million in fiscal 2008 compared to
increases of 13.4% in 2007 and 12.3% in 2006. Drugstore sales increases resulted
from sales gains in existing stores and added sales from new stores, each of
which include an indeterminate amount of market-driven price changes. Sales in
comparable drugstores were up 4.0% in 2008, 8.1% in 2007 and 7.7% in 2006.
Comparable drugstores are defined as those that have been open for at least
twelve consecutive months without closure for seven or more consecutive days
and without a major remodel or a natural disaster in the past twelve months.
Relocated and acquired stores are not included as comparable stores for the
first twelve months after the relocation or acquisition. We operated 6,934 locations
as of August 31, 2008, compared to 5,997 at August 31, 2007, and 5,461
at August 31, 2006.
Prescription sales increased 9.7% in 2008, 14.7% in 2007 and 13.3% in 2006.
Comparable drugstore prescription sales were up 3.9% in 2008 compared to
increases of 9.5% in 2007 and 9.2% in 2006. Prescription sales as a percent of
total net sales were 64.9% in 2008, 65.0% in 2007 and 64.3% in 2006. The
effect of generic drugs introduced during the fiscal year, which replaced higher
priced retail brand name drugs, reduced prescription sales by 3.5% for 2008,
4.2% for 2007 and 2.0% for 2006, while the effect on total sales was 2.2% for
2008, 2.5% for 2007 and 1.2% for 2006. Third party sales, where reimbursement
is received from managed care organizations, the government or private insurers,
Introduction
Walgreens is principally a retail drugstore chain that sells prescription and non-
prescription drugs and general merchandise. General merchandise includes,
among other things, beauty care, personal care, household items, candy,
photofinishing, greeting cards, convenience foods and seasonal items. Customers
can have prescriptions filled in retail pharmacies, as well as through the
mail, by telephone and via the Internet. As of August 31, 2008, we operated
6,934 locations in 49 states, the District of Columbia, Guam and Puerto Rico.
Total locations do not include 217 convenient care clinics operated by
Take Care Health Systems, Inc.
Number of Locations
Location Type 2008 2007 2006
Drugstores 6,443 5,882 5,414
Worksite Facilities 364 3–
Home Care Facilities 115 101 38
Specialty Pharmacies 10 86
Mail Service Facilities 233
Total 6,934 5,997 5,461
The drugstore industry is highly competitive. In addition to other drugstore chains,
independent drugstores and mail order prescription providers, we compete with
various other retailers including grocery stores, convenience stores, mass merchants
and dollar stores.
The long-term outlook for prescription utilization is strong due in part to the aging
population and the continued development of innovative drugs that improve quality
of life and control health care costs. Certain provisions of the Deficit Reduction Act
of 2005 seek to reduce federal spending by altering the Medicaid reimbursement
formula for multi-source (i.e., generic) drugs. These changes are expected to result
in reduced Medicaid reimbursement rates for our retail pharmacies.
Front-end sales have continued to grow due to strengthening core categories, such
as over-the-counter non-prescription drugs, beauty care, household and personal
care products. Walgreens strong name recognition continues to drive private brand
sales, which are included in these core categories.
We continue to expand into new markets and increase penetration in existing
markets. To support our growth, we are investing significantly in prime locations,
technology and customer service initiatives. Retail organic growth continues to be
our primary growth vehicle; however, consideration is given to retail and other
acquisitions that provide unique opportunities and fit our business strategies, such
as the acquisitions of I-trax, Inc. and Whole Health Management, operators of
worksite health centers, including primary and acute care, wellness, pharmacy
and disease management services and health and fitness programming.
We are engaged in company-wide strategic initiatives to broaden access to our
products and services, enhance the customer experience for our shoppers,
patients and payors, and reduce costs to improve productivity. These strategies
are intended to enable us to provide the most convenient access to consumer
goods and services, and pharmacy, health and wellness services; offer a consistent
customer experience across all channels; and ensure that cost, culture and
capabilities support and enable our strategies. On October 30, 2008, we
announced an initiative to improve efficiency and effectiveness, which targets
$1 billion in annual cost savings by fiscal 2011. In conjunction with this initiative,
we anticipate incurring total costs of approximately $300 million to $400 million
over fiscal 2009 and 2010.
Page 18 2008 Walgreens Annual Report