S E C U R I T I E S A N D E X C H A N G E C O M M I S S I O N
WASHINGTON, D. C. 20549
_______________________
FORM 10-Q
(Mark One)
____X____ Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter ended November 30, 1993.
or
__________ Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from _____________ to _____________
Commission file number 1-604.
WALGREEN CO._______________________________
(Exact name of registrant as specified in its charter)
ILLINOIS 36-1924025__________________
(State of incorporation) (I.R.S. Employer Identification No.)
200 Wilmot Road, Deerfield, Illinois 60015___
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (708) 940-2500___
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ___X___ No _______
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the close of the period covered by this report
(applicable only to corporate issuers).
COMMON STOCK, $.625 PAR VALUE; ISSUED AND OUTSTANDING 123,070,536 AT
NOVEMBER 30, 1993.
Page 1 of 10
WALGREEN CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The consolidated condensed financial statements included herein have
been prepared by the company pursuant to the rules and regulations of the
Securities and Exchange Commission. The Consolidated Condensed Balance
Sheet as of November 30, 1993 and the Consolidated Condensed Statements of
Earnings for the three months ended November 30, 1993 and 1992, and the
Consolidated Condensed Statements of Cash Flows for the three months ended
November 30, 1993 and 1992 have been prepared without audit. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the company believes that the disclosures are
adequate to make the information presented not misleading. It is
suggested that these consolidated condensed financial statements be
read in conjunction with the financial statements and the notes thereto
included in the company's latest annual report on Form 10-K.
In the opinion of the company the condensed statements for the
unaudited interim periods presented include all adjustments, consisting
only of normal recurring adjustments, necessary to present a fair
statement of the results for such interim periods. Because of the
influence of certain holidays, seasonal and other factors on the company's
operations, net earnings for any interim period may not be comparable to
the same interim period in previous years, nor necessarily indicative
of earnings for the full year.
2
<TABLE>
WALGREEN CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
November 30, August 31,
1993 1993
<CAPTION>
(In Thousands)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 22,110 $ 91,597
Marketable securities, at cost which
approximates market 16,600 29,695
Accounts receivable, net of allowances
for doubtful accounts of $24,995,000 at
November 30 and $23,050,000 at August 31 158,121 139,313
Inventories 1,270,800 1,094,035
Other current assets 88,302 108,493
Total Current Assets 1,555,933 1,463,133
Property and Equipment, at cost, less
accumulated depreciation and amortization
of $477,672,000 at November 30 and
$453,155,000 at August 31 970,513 927,333
Other Non-Current Assets 146,696 144,725
TOTAL ASSETS $2,673,142 $2,535,191
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 12,977 $ -
Trade accounts payable 541,061 427,185
Other current liabilities 437,954 456,322
Total Current Liabilities 991,992 883,507
Non-Current Liabilities:
Deferred income taxes 177,783 173,343
Other non-current liabilities 101,727 99,590
Total Non-Current Liabilities 279,510 272,933
Shareholders' Equity:
Preferred stock $.50 par value; authorized
4,000,000 shares; none issued - -
Common stock $.625 par value; authorized
400,000,000 shares; issued and outstanding
123,070,536 at November 30 and August 31 76,919 76,919
Retained earnings 1,324,721 1,301,832
1,401,640 1,378,751
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $2,673,142 $2,535,191
========== ==========
<FN>
The accompanying Notes to Consolidated Condensed Financial
Statements are an integral part of these Statements.
</TABLE>
3
<TABLE>
WALGREEN CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED)
<CAPTION>
Three Months Ended
November 30,
1993 1992
(Dollars in Thousands
Except Per Share Data)
<S> <C> <C>
Net Sales $2,117,954 $1,914,630
Costs and Deductions:
Cost of sales 1,528,152 1,387,176
Selling, occupancy and
administration 518,443 462,379
2,046,595 1,849,555
Other (Income) Expense:
Interest income (1,010) (1,953)
Interest expense 769 3,376
(241) 1,423
Earnings before income tax provision
and cumulative effect of accounting
changes 71,600 63,652
Income tax provision 27,387 24,024
Earnings before cumulative effect of
accounting changes 44,213 39,628
Cumulative effect of accounting changes - (23,623)
Net Earnings $ 44,213 $ 16,005
=========== ===========
Per Share:
Earnings before cumulative effect
of accounting changes $ .36 $ .32
Cumulative effect of accounting
changes - (.19)
Net Earnings $ .36 $ .13
=========== ===========
Dividends Declared $ .17 $ .15
=========== ===========
<FN>
The accompanying Notes to Consolidated Condensed Financial
Statements are an integral part of these Statements.
</TABLE>
4
<TABLE>
WALGREEN CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three Months Ended
November 30,
1993 1992
(In Thousands)
<S> <C> <C>
Net cash (used for) provided by operating
activities $ (6,118) $ 3,646
Cash (Used for) Provided by Investing Activities:
Additions to property and equipment (72,361) (46,740)
Net sales of marketable securities 13,095 9,291
Proceeds from disposition of property and
equipment 1,795 1,612
Other 401 (807)
Net cash used for investing activities (57,070) (36,644)
Cash (Used for) Provided by Financing Activities:
Payments of long-term obligations (989) (677)
Cash dividends paid (18,460) (15,999)
Proceeds from notes payable 12,977 -
Proceeds from employee stock plans 570 1,178
Cost of employee common stock purchase and
option plans (397) (865)
Net cash used for financing activities (6,299) (16,363)
Changes in Cash and Cash Equivalents:
Net decrease in cash and cash equivalents (69,487) (49,361)
Cash and cash equivalents at beginning
of year 91,597 144,540_
Cash and Cash Equivalents at end of period $ 22,110 $ 95,179
========== ==========
<FN>
The accompanying Notes to Consolidated Condensed Financial
Statements are an integral part of these Statements.
</TABLE>
5
WALGREEN CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) First quarter fiscal 1993 results have been restated to reflect the
early adoption of two Financial Accounting Standards Board pronouncements in the
fourth quarter of fiscal 1993. The adoption of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," resulted in a
cumulative pretax charge of $59,138,000 ($36,813,000 after tax; $.30 per share).
The adoption of SFAS No. 109, "Accounting for Income Taxes," increased net
earnings $13,190,000 ($.11 per share). In addition, accounting for
postretirement benefits other than pensions on an accrual basis resulted in a
$1,020,000 ($.01 per share) charge against first quarter fiscal 1993 pretax
earnings. The effective date of adoption of both standards was September 1,
1992.
(2) Inventories are valued on a lower of last-in, first-out (LIFO) cost or
market basis. At November 30, 1993 and August 31, 1993, inventories would
have been greater by $397,743,000 and $388,464,000 respectively, if they had
been valued on a lower of first-in, first-out (FIFO) cost or market basis. LIFO
inventory costs can only be determined at the end of each fiscal year when
inflation rates and inventory levels are finalized; therefore, LIFO inventory
costs for interim financial statements are estimated. Cost of sales is
primarily computed on an estimated basis and adjusted based on periodic physical
inventories.
(3) The weighted average number of common shares and equivalents used for
calculating primary net earnings per share was 123,726,000 and 123,737,000 for
the quarters ended November 30, 1993 and 1992, respectively. Fully diluted net
earnings per share are the same as primary net earnings per share.
(4) On December 15, 1992, the company redeemed the $100 million 9 1/2%
sinking fund debentures, due 2016, at a cost of $6,821,000 ($.03 per share).
The redemption was recorded in the second quarter ending February 28, 1993.
(5) The company is involved in various legal proceedings incidental to the
normal course of business. These include one group of product liability claims
filed against the company seeking damages for alleged personal injuries
resulting from the ingestion of an over-the-counter product alleged to contain a
contaminated bulk material. The company has secured an indemnification from the
American subsidiary of a foreign manufacturer, under which over 50% of the cases
have been settled or dismissed without the company being required to make any
payments. The company also has product liability insurance which it believes
provides coverage against these claims. While it is not feasible to predict the
outcome of the remaining product liability claims and other legal proceedings
and claims with certainty, management is of the opinion, with which its General
Counsel concurs, that their ultimate disposition will not have a material
adverse effect on the company's consolidated financial position or results of
operations.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Net earnings for the first quarter were $44,213,000 or $.36 per share. This
was an 11.6% increase over last year's earnings before cumulative effect of
accounting changes for postretirement benefits and income taxes of
$39,628,000 or $.32 per share. These changes involved restatement of first
quarter fiscal 1993 earnings to reflect the new accounting standards, after
which net earnings were $16,005,000 or $.13 per share.
Earning increases resulted from improved sales, higher gross margins and
lower interest expense offset by higher selling, occupancy and
administration expenses.
Sales for the quarter ended November 30, 1993 increased 10.6% to
$2,117,954,000. Drugstore sales increases resulted from sales gains in
existing stores and added sales from new stores, which include an
indeterminate amount of market-driven price changes. Comparable drugstore
sales gains were 5.3% for the quarter. New store openings accounted for
6.3% of the quarterly sales increase. The company operated 1,889 drugstores
as of November 30, 1993 compared to 1,761 a year earlier.
Prescriptions continued to be the strongest sales category, increasing 19.4%
for the quarter with comparable stores sales increasing 13.2%. The company
is experiencing its highest level prescription increases since 1988. The
number of Walgreen-filled prescriptions has risen nearly 60% in the past
five years. Prescription sales accounted for 41% of sales compared to 38% a
year ago.
Favorable prescription sales trends should continue. The population
continues to age. People over 65 were 12% of the population in 1990 and
could be 15% of the population by 2010. This group accounts for a third of
the annual healthcare bill in the U.S. today and could be 50% by the year
2000. The development of new drugs is expected to continue, with special
emphasis on drug therapy for diseases that affect the elderly. Proposed
healthcare reform is another factor that could result in additional
prescription use. Universal pharmaceutical coverage, for example, would
extend prescription benefits to as many as 70 million people who don't have
them today. Besides these external factors, the company is expanding in new
and existing markets. Future growth is also expected in both Healthcare
Plus (the company mail service subsidiary) and RxPress (pharmacy-only
stores).
Cost of sales, expressed as a percent to sales, decreased in the first
quarter to 72.15% from 72.45% last year. Reduced gross margins in the
prescription category were offset by improved gross margins in general
merchandise. The company uses the lower of last-in, first-out (LIFO) method
of inventory valuation. The estimated annual inflation rates were 2.75% for
fiscal 1994 and 3.25% for 1993, which resulted in charges to cost of sales
of $9.3 million versus $10.1 million for the same period a year ago. The
decline in the rate resulted from lower inflation estimates for almost all
categories of merchandise.
Selling, occupancy and administration expenses increased to 24.48% from
24.15% in the quarter. As a percent to sales, decreases in headquarters
7
salaries and improved bad debt experience were more than offset by higher
store salaries and advertising expense. New stores, which temporarily
experience higher salary expense ratios, and the 97 additional stores open
24 hours were the principal reasons for the salary increase as a percent to
sales.
Interest expense decreased due to the December 1992 early redemption of the
company's $100 million 9 1/2% sinking fund debentures which cost the company
$6,821,000 ($.03 per share) in the second quarter last year. This reduced
annual interest expense $9.5 million. The decrease in interest income for
the quarter resulted from lower investment rates and levels. Average net
investment levels were approximately $65.6 million in 1993 versus $172.0
million in 1992.
The 1993 effective tax rate increased to 38.25% from 37.74% primarily due to
the changes in the federal income tax law enacted in August 1993.
Financial Condition
Cash and cash equivalents and marketable securities were $38.7 million at
November 30, 1993, even after the redemption of $100 million in debentures
which occurred in the second quarter of fiscal 1993. Short-term investment
objectives are to maximize yields while minimizing risk and maintaining
liquidity. To attain these objectives, investment limits are placed on the
amount, type, and issuer of securities.
Net cash used by operating activities declined $10 million compared to the
same period a year ago; however, the company's ongoing profitability is
expected to continue supporting expansion and remodeling programs, dividends
to shareholders and the funding for various technological improvements.
Net cash used for investing activities was $57 million for the first quarter
versus $37 million last year. Additions to property and equipments were $72
million. Sixty-three stores opened in the first quarter of fiscal 1994 --
the largest non-acquisition quarterly growth ever. This compares to 36
stores opened in the same quarter last year. Forty-three stores were opened
in November alone. Planned capital expenditures for fiscal 1994 are $300
million. Plans include opening 175 drugstores and retrofitting all
pharmacies with new workstations and laser printers during the fiscal year.
In addition, the company plans to enter new markets such as Cleveland and
Buffalo next fall. By 1996, expectations are to be opening 200 stores per
year across the country. The company's goal is to operate 3,000 stores by
the year 2000. The company also plans to open a new mail service facility
in Tempe, Arizona. An eighth major distribution center is planned to open
in fiscal 1995 near Sacramento, California, to serve the growing store base
in the western United States.
Net cash used for financing activities was $6 million for the first quarter
of fiscal 1994 compared to $16 million in fiscal 1993. During the quarter
the company obtained $13 million through the placement of commercial paper.
These funds were used to finance pre-holiday inventory requirements. At
November 30, the company had $112 million in unused bank lines of credit and
$100 million of unissued authorized debt securities, previously filed with
the Securities and Exchange Commission. In addition, the company has the
ability to borrow up to $75 million against corporate-owned life insurance
policies.
There are no accounting standards issued that have not been adopted which
would have a material impact on the company's financial statements.
8
PART II. OTHER INFORMATION
Item 6. Reports on Form 8-K
A report on Form 8-K was filed on October 15, 1993,
reporting under "Item 5. Other Events." that the
company elected the early adoption of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions," and SFAS No. 109, "Accounting for Income Taxes,"
in its fourth quarter ended August 31, 1993.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WALGREEN CO._________
(Registrant)
Date January 11, 1994 C. D. Hunter_________
Vice Chairman
(Chief Financial Officer)
Date January 11, 1994 R. H. Clausen________
Controller
(Chief Accounting Officer)
10
