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Walgreens' cash flow using its 2011 annual report. Currently ranked as the largest drugstore chain in the U.S., Walgreens had its beginnings in 1901 when Charles R. Walgreen bought the Chicago drugstore where he worked as a pharmacist. Over the next two decades, Walgreen bought 20 additional stores, adding such features as soda fountains with luncheon service, as well as his own line of drug products. The company added its first photofinishing studio in 1919 and introduced the malted milkshake at its fountain counters in 1922. By 1925, Walgreens had 65 stores with total annual revenue of $1.2 million. Walgreens' sales passed the $1 billion mark in 1975, and the company continued its growth and innovation to its current position of leadership in the retail pharmacy industry (Funding Universe, n.d.). With record profits of $2.7 billion in fiscal year 2011, Walgreens filled 819 million prescriptions, a figure that equates to one in five retail prescriptions in the U.S. The company is headquartered in Deerfield, IL and has over 247,000 employees (Walgreens, 2011).
Analysis of Cash Flow Statements
Analyzing Walgreens' cash flow statement provides indications of the company's performance in 2011. Net earnings increased by $623 million over 2010, continuing a positive trend from 2009 as well, although the increase of $85 million was not as large. While this earnings increase was positive, it was not sufficient to offset Walgreens' negative cash outflows over the same period.
Walgreens' cash flow statement shows the company reported net cash provided by operating activities amounting to $3.64 billion. A decrease from the previous year of $3.74 billion represented an increase in working capital. With 2011 net earnings of $2.7 billion, Walgreens' net earnings increased by 29.8% over 2010. Walgreens attributed the sizable increase to higher gross margins, as well as to the sale of its pharmacy benefit management business and a lower effective tax rate (Walgreens, 2011).
Walgreens cash flow from operations (CFO) showed non-cash expenses that included $1.09 billion in depreciation and amortization. Walgreens' CFO also showed an adjustment of $434 million for the sale of its pharmacy benefit management business, which is a cash flow not normally generated by its regular business operations. Walgreens' uses of cash included increases in accounts receivable, inventories and other assets, all of which were used to generate income during its operations. Walgreens' sources of cash included increases in accounts payable, income taxes and other liabilities. The company used cash from operations to provide funds for its expansion, acquisitions, remodeling programs, dividends to shareholders and stock repurchases (Walgreens, 2011).
Walgreens' used its cash flow from investing (CFI) to acquire long-term assets. The company had additions to property and equipment of $1.2 billion, up from the $1.0 billion the preceding year. These numbers reflected the company's continued growth, adding 164 locations net in 2011 and 550 net in 2010. Walgreen's growth also included business acquisitions. The company acquired drugstore.com for $398 million, thereby expanding its online operations. It also acquired 258 Duane Read stores and operation in New York City for $560 million. Total net CFI of $1.5 billion showed a significant investment by Walgreens in projects that the company expects to lead to future growth (Walgreens, 2011).
Walgreens' used cash flow from financing (CFF) to repurchase shares totaling $2.0 billion in 2010, up from $1.8 billion the preceding year. The company also paid dividends in 2011 of $647 million, up from $541 million in 2010 (Walgreens, 2011).
Walgreens cash flow statement showed how the company raised money and how it spent those funds during the 2011 fiscal year. The cash flow statement also gave an indication of Walgreens' ability to cover its expenses in the near-term. Walgreens ended the 2011 fiscal year with cash and cash equivalents totaling $1.6 billion, compared to $1.9 billion in 2010. Even though Walgreens ran a negative cash balance in both 2010 and 2011, it had an overall positive cash balance because of its cash surplus beginning both years.
Cash and Liquidity Position
Overall, Walgreen's annual report indicates liquidity problems. A possible explanation may be that Walgreen's expansion and acquisition efforts, in combination with its stock repurchase, were too aggressive. Or conversely, the company was not generating sufficient cash to support these activities. Taken together, they depleted the company's cash. Walgreens' cash flow ratio, which is the ratio of CFO to current liabilities, is only .45 in 2011; in 2010 it was .50. This ratio should be 1.0, that is, the company's short-term debts and cash should be close to equal.
Since this ratio indicates how money moves into and out of the company, it provides an indication of Walgreen's abilities to pay its bills. It shows that in the short run, Walgreen's liquidity was less than it should be; the company was not generating enough cash to pay off its short-term debt. This could be cause for concern to investors and creditors.
Moreover, the company may face difficulty borrowing money to meet its obligations. In the "Liquidity and Capital Resources" section of its annual report, Walgreens disclosed its credit ratings as of October 25, 2011. While Walgreens long-term debt rating of A2 indicates a superior ability to repay, the negative outlook rating gives Moody's "opinion regarding the likely direction of an issuer's rating over the medium term" (Moody, 2009, p.52). Similarly, Standard & Poor's negative outlook indicates that a company's rating may be lowered during a six-month to two-year timeframe (Standard & Poor, 2011). Given that credit ratings impact Walgreens' borrowing costs, access to capital markets and operating lease costs, these negative ratings could pose challenges to Walgreens' ability to borrow funds to ease its liquidity problems. At best, Walgreens potentially faces higher costs of borrowing.
Moody's issued an announcement explaining that the change in Walgreens' rating from stable to negative reflected Moody's concern that Walgreens would not be able to successfully resolve its contract dispute with Express Scripts. Walgreen's announcement that it would not participate in Express Scripts' pharmacy benefit network put at risk a significant amount of Walgreen's revenue, about $5.3 billion or 7.5%. Moody's also felt that Walgreens' front end sales could suffer as well, given the possibility of reduced store traffic (Moody's Investors Service, 2011).
Moody's announcement also commented on Walgreens' being "weakly positioned in the A2 rating level as its credit metrics -- while solid -- are weak for the rating" (Moody's Investors Service, 2011). Moody's noted that Walgreens' A2 senior unsecured rating reflects the company's strong market position, along with its long history of stable operating performance. The A2 rating was also supported by Walgreens' low level of funded debt relative to the size of its earnings and cash balances (Moody's Investors Service, 2011).
How Walgreens Finances Its Operations
Walgreens' cash flow statement showed that most of the company's cash came from its operating activities. Given that CFF and CFI were both negative, $2.4 and $1.5 billion respectively, only the company's operating activities produced positive net cash flow. However, because CFF and CFI exceeded CFO in 2011, Walgreens saw a net decrease in cash of $324 million. Likewise in 2010 there was a net decrease of $207 million.
Industry Ratio Analysis
In the drug store industry, Walgreens leads the industry based on some ratios, but other ratios place the company either trailing its competitors, or even ranking near the bottom. For market capitalization, CVS Caremark ranks first with $58.1 billion, Walgreens' is second with $28.3 billion. Likewise, Walgreen's ROE is second in the industry at 17.85%, behind industry leader China Jo-Jo. Walgreens is the industry leader for dividend yield of 2.70%, placing it well ahead of second place CVS Caremark at 1.50%. For total revenue, CVS Caremark leads the industry at $107.1 billion, with Walgreens coming in second at $73.1 billion, well ahead of Rite Aid at $25.4 billion (Yahoo! Finance, 2012).
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Walgreens Liquidity and Cash Flow The Management's Discussion and Analysis, together with the Consolidated Statement of Cash Flows and Notes, provide insight into the company's sources and uses of cash. Over the two-year period for the years ending August 31, 2009 thru 2011, the company has seen large cash outflows which affected its cash position and its liquidity. Net cash provided by operations declined from $4.1 billion in 2009 to $3.6 billion
7 14949.4 16860 18861.8 19394.5 19933.7 20479 20882.2 Looking at these figures, we can see immediately that the most important assumption Gates has made with respect to free cash flow is that the project will go beyond the initial three years contract. The nominal value of the cash flows associated with those first three years does not equal the initial outlay. Thus, for the project to be profitable, the company must take it well beyond the three-year time