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Walgreens impresses Wall Street analysts.

NEW YORK -- Despite the fact that Hurricane Katrina took some of the luster off Walgreen Co.'s results for the fourth quarter of fiscal 2005, the company nonetheless again turned in the kind of performance to which Wall Street has become accustomed.

During a presentation at Goldman Sachs Group Inc.'s Global Retailing Conference last month, director of finance Rick Hans and senior vice president of corporate strategy and treasurer John Gleeson outlined for analysts and investors some of the highlights of the company's performance over the years as well as detailing some of the strengths that the chain drug retailer will carry into the future.

Hans pointed out that a compound annual growth rate (CAGR) of 12.8% has driven 31 years of record sales, but earnings have done even better--rising at an 18.9% CAGR. During that period, he added, the stock price has performed well, too, climbing at an astonishing 22.5% CAGR since 1974. Since 2000, however, that pace has cooled to 7.6%.

Most retail industry watchers look closely at comparable-store sales growth as a key performance metric, and Walgreens, not surprisingly, has excelled in that measure although the growing role of generic drugs in the pharmacy sales mix has caused pharmacy comps to slow from 13.2% growth in fiscal 2003 to 9.8% in fiscal 2005, which ended in August.

When measured against competitors CVS Corp., Rite Aid Corp., Wal-Mart Stores Inc. and Target Corp., Walgreens has registered the highest total comparable-store sales increases every month since May with the exception of June, when Target took the prize.

Moreover, Walgreens still claims the highest average daily sales per store, with $24,000, and the highest daily prescription sales per store (about $14,000) in the chain drug industry. However, Hans reiterated the familiar theme that Walgreens management considers prescription counts to be a more reliable performance indicator than pharmacy sales due to the effect of generics.

By that measure Walgreens has set the bar at a high level. Since 1998, when annual prescriptions totaled somewhat less than 250 million (trailing CVS), Walgreens' script total climbed to just over 450 million in 2004, well ahead of any competitor.

Hans noted that both comparable-store pharmacy sales and script count growth have declined since February. "The slowdown may be a result of concern over [Merck & Co.'s] Vioxx," he said. "And there hasn't been as much consumer advertising by big pharma. What we need is a good flu season."

Much more important than the next flu season, though, is the looming growth in the prescription drug market. In 1999, he pointed out, Walgreens dispensed 9.8% of the 2.9 billion scripts written. Last year the chain expanded its share to 14% of the total of 3.3 billion scripts--a share equal to that of all supermarket pharmacies in the country combined.

"We want a bigger piece of the bigger pie that's coming," he concluded.

Gleeson detailed the investments and infrastructure that have driven and will continue to fuel Walgreens' growth. Over the last decade, he pointed out, the chain has grown its store base from a total of 2,085 to 4,953. More important, the company has transformed its store base, going from 639 freestanding units in 1995 to 4,158 at the end of fiscal 2004.

And more are coming. Gleeson pointed out that the company currently has 1,200 new locations in its development pipeline.

"We've budgeted over $1.2 billion for capital expenditures, and about half of that will go to new-store development," he said. "Our rate of store openings is increasing, and our goal remains to have 7,000 stores by 2010. We have the personnel to do this."

Backing up the store expansion, of course, is aggressive development of the chain's logistics infrastructure. In 2007 Walgreens will open a distribution center in Anderson, S.C., that will represent a great step forward in split-case picking technology.

Supplementing its distribution hardware is Walgreens' supply chain system, which the company has recently enhanced and dubbed SIMS Plus. "Probably the most impressive piece is the improvement of our forecasting methodology, which affects the way we order for our distribution centers," says Gleeson. "We have already seen dramatic improvements in our days of supply in our DCs and in our front-end merchandising, where demand-based forecasting has been implemented. Our suppliers are using these forecasts, and all that results in better service to the stores and their customers and in lower inventory costs."
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Geographic Code:1USA
Date:Oct 17, 2005
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