SECURITIES AND EXCHANGE COMMISSION
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 MAY 31, 1997
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)
(847) 940-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed 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 [ ]
The number of shares issued and outstanding of the registrant's
Common Stock, $.3125 par value, as of June 30, 1997 was
246,141,072.
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 May 31, 1997 and the
Consolidated Condensed Statements of Earnings for the three and
nine months ended May 31, 1997 and 1996, 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
WALGREEN CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
May 31, August 31,
1997 1996
(In Thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 137,689 $ 8,819
Accounts receivable 342,860 288,538
Inventories 1,651,864 1,631,974
Other current assets 76,772 89,707
Total Current Assets 2,209,185 2,019,038
Property and Equipment, at cost, less
accumulated depreciation and amortization
of $767,550,000 at May 31 and
$659,169,000 at August 31 1,611,103 1,448,368
Other Non-Current Assets 173,761 166,240
TOTAL ASSETS $ 3,994,049 $ 3,633,646
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 727,813 $ 691,836
Other current liabilities 568,344 490,119
Total Current Liabilities 1,296,157 1,181,955
Non-Current Liabilities:
Deferred income taxes 147,630 145,218
Other non-current liabilities 279,158 263,368
Total Non-Current Liabilities 426,788 408,586
Shareholders' Equity:
Preferred stock $.25 par value; authorized
8,000,000 shares; none issued - -
Common stock $.3125 par value; authorized
800,000,000 shares; issued and
outstanding 246,141,072 at May 31 and
August 31 76,919 76,919
Retained Earnings 2,194,185 1,966,186
Total Shareholders' Equity 2,271,104 2,043,105
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 3,994,049 $ 3,633,646
The accompanying Notes to Consolidated Condensed Financial
Statements are an integral part of these Statements.
3
WALGREEN CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended Nine Months Ended
May 31, May 31,
1997 1996 1997 1996
(Dollars in Thousands Except Per Share Data)
Net Sales $3,403,281 $2,988,836 $10,059,880 $8,860,692
Costs and Deductions:
Cost of sales 2,470,643 2,165,612 7,291,153 6,409,200
Selling, occupancy
and administration 757,441 674,902 2,231,667 1,992,970
3,228,084 2,840,514 9,522,820 8,402,170
Other (Income)Expense:
Interest income (1,641) (1,574) (4,258) (3,857)
Interest expense 346 385 1,627 1,920
(1,295) (1,189) (2,631) (1,937)
Earnings before income
tax provision 176,492 149,511 539,691 460,459
Income tax provision 68,391 57,936 209,131 178,428
Net earnings $ 108,101 $ 91,575 $ 330,560 $ 282,031
Per Share:
Net earnings $ .44 $ .37 $ 1.33 $ 1.14
Dividends declared $ .12 $ .11 $ .36 $ .33
The accompanying Notes to Consolidated Condensed Financial
Statements are an integral part of these Statements.
4
WALGREEN CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
May 31,
1997 1996
(In Thousands)
Net cash provided by operating activities $ 505,875 $ 306,853
Cash Flows from Investing Activities:
Additions to property and equipment (289,060) (243,210)
Other (7,101) 61,341
Net cash used for investing activities (296,161) (181,869)
Cash Flows from Financing Activities:
Cash dividends paid (86,155) (78,159)
Other 5,311 (20,936)
Net cash used for financing activities (80,844) (99,095)
Changes in Cash and Cash Equivalents:
Net increase in cash and cash equivalents 128,870 25,889
Cash and cash equivalents at beginning
of year 8,819 22,245
Cash and Cash Equivalents at end of period $ 137,689 $ 48,134
The accompanying Notes to Consolidated Condensed Financial
Statements are an integral part of these Statements.
5
WALGREEN CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) Inventories are valued on a lower of last-in, first-out
(LIFO) cost or market basis. At May 31, 1997 and August 31, 1996,
inventories would have been greater by $447,264,000 and
$427,767,000 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 annually 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 inventories.
(2) The weighted average number of common shares and
equivalents used for calculating primary net earnings per share was
248,962,000 and 248,388,000 for the nine months ended May 31, 1997
and 1996, respectively. Fully diluted net earnings per share are
the same as primary net earnings per share.
On July 9, 1997, the Board of Directors voted a two-for-one
stock split to be distributed August 8, 1997, to shareowners of
record July 22, 1997. In addition the Board of Directors approved
increases in the authorized common stock, from 800 million shares
to 1.6 billion shares, and in the authorized preferred stock, from
8 million shares to 16 million shares. All per share amounts
referenced herein are reflected on a pre-split basis.
Under the terms of the Rights Agreement dated July 10, 1996,
the aforementioned stock split will cause a proportionate
adjustment in the preferred share purchase rights, which are fully
described in the Agreement.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net earnings for the third quarter, ended May 31, 1997, were $108.1
million or $.44 per share. This was an 18.0% increase over last
year. Net earnings for the nine months were up 17.2% to $330.6
million or $1.33 per share. Earnings increases resulted from
improved sales and lower expense ratios, which were partially
offset by lower gross margins.
Sales increased by 13.9% in the third quarter, to $3.4 billion, and
rose by 13.5% to $10.1 billion for the first nine months.
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. Comparable
drugstore (those open at least one year) sales were up 8.6% for the
quarter and 8.2% for the first nine months. New store openings
accounted for 8.7% of the quarterly and nine-month sales increases.
The company operated 2,289 drugstores as of May 31, 1997, compared
to 2,149 a year earlier.
Pharmacy sales increased 18.9% for the third quarter and 17.6% for
the first nine months. Prescription sales in comparable stores
were up 14.0% and 12.6% for the quarter and nine-month period,
respectively. Pharmacy sales trends are expected to continue
primarily because of expansion into new markets, increased
penetration in existing markets and demographic changes such as the
aging population.
Gross margins decreased in the quarter to 27.4% of sales from 27.5%
last year and to 27.5% from 27.7% for the nine-month period.
Prescription margins continue to decrease as third party retail and
mail order sales become a larger portion of pharmacy sales. The
company is responding to gross margin pressures by emphasizing
minimum third party profitability standards. Improved gross
margins in the rest of the store helped offset the decline.
The company uses the LIFO method of inventory valuation, which can
only be determined annually when inflation rates and inventory
levels are finalized: therefore, LIFO inventory costs for interim
financial statements are estimated. Cost of sales included a LIFO
provision of $4.3 million ($.01 per share) and $19.5 million ($.05
per share) for the quarter and nine-month period ended May 31, 1997
versus $3.6 million ($.01 per share) and $17.6 million ($.04 per
share) for the same period a year ago.
Selling, occupancy and administration expenses decreased to 22.3%
from 22.6% of sales in the quarter and to 22.2% from 22.5% of sales
for the nine months. Lower advertising expenses and headquarters
costs, as a percent to sales, were the principal reasons for the
decline in the quarter and nine months. The growth in mail order
pharmacy, which has a lower expense ratio, also contributed to the
decrease.
FINANCIAL CONDITION
Cash and cash equivalents were $137.7 million at May 31, 1997,
compared to $48.1 million at May 31, 1996. 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.
7
Net cash provided by operating activities for the first nine months
of fiscal 1997 was $505.9 million compared to $306.9 million a year
ago. The change between periods was principally due to higher
earnings and better inventory control due in part to the company's
"SIMS" inventory management system. The company's profitability is
the principal source for providing expansion and remodeling
programs, dividends to shareholders and funding for various
technological improvements.
Net cash used for investing activities was $296.2 million versus
$181.9 million last year. Additions to property and equipment were
$289.1 million compared to $243.2 million last year. During the
first nine months of fiscal 1997, 151 new or relocated drugstores
were opened. This compares to 124 new or relocated drugstores
opened in the same period last year. New stores are owned and
leased. There were 67 owned locations opened during the first nine
months of the year or under construction at May 31, 1997 versus 35
for the same period last year. Capital expenditures for fiscal
1997 are expected to exceed $400 million. During the first nine
months, the company borrowed $12.7 million from corporate-owned
life insurance policies versus $76.3 million last year.
The company expects to open 230 new stores in fiscal 1997,
including units in the new markets of Detroit and Kansas City.
Plans are to escalate new store openings to 280 per year beginning
in 1998 and to be operating 3,000 stores across the country by the
year 2000. This may necessitate future long-term borrowings.
Intercom Plus, an advanced pharmacy computer and workflow system,
is expected to be fully implemented in early fiscal 1998.
Net cash used for financing activities was $80.8 million compared
to $99.1 million a year ago. Proceeds from a financing arrangement
related to employee stock purchases was the primary reason for the
decrease in cash used. At May 31, 1997, the company has $143
million in unused bank lines of credit and $100 million of unissued
authorized debt securities, previously filed with the Securities
and Exchange Commission.
In Fiscal 1995, the company received an unfavorable Tax Court
ruling concerning the depreciable lives of certain assets. The
company appealed, and on October 17, 1995, the United States Court
of Appeals rendered an opinion which reversed the ruling. The
case, which involves approximately $53 million of tax, including
after tax interest, was remanded back to the Tax Court for further
findings which are in the process of being finalized. As of May
31, 1997, the company has adequately provided for the tax and
related interest.
Financial Accounting Board Statement No. 123 "Accounting for Stock
Based Compensation" was issued in October 1995. This
pronouncement, which must be implemented by fiscal year end, will
require the company to disclose the effect on income of stock
options based on a formula outlined in the bulletin. This
pronouncement is not expected to materially impact the company's
consolidated financial position or results of operations.
In March 1997, Statement No. 128 "Earnings Per Share" was issued.
Under this pronouncement, which must be adopted in our fiscal 1998
second quarter, "basic earnings per share" and "diluted earnings
per share", as defined by the bulletin, will replace "primary
earnings per share" and "fully diluted earnings per share." The
objective is to make the computation more compatible with
international accounting standards. The company does not expect
basic earnings per share to be materially different from primary
earnings per share.
In June 1997, the Financial Accounting Standards Board issued two
new pronouncements which must be adopted by fiscal 1999; SFAS No.
130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures
About Segments of an Enterprise and Related Information." SFAS No.
130 is not expected to impact the company. SFAS No. 131, which
requires a "management approach" to segment reporting, is currently
being evaluated.
8
PART II. OTHER INFORMATION
Item. 6 Exhibits and Reports on Form 8-K
(a) Exhibits filed with this report:
10. Walgreen Co. Management Incentive Plan Amendment
No. 1, effective April 9, 1997.
27. Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K was filed on April 14, 1997, reporting
under "Item 5. Other Events." that Charles R. Walgreen III would
retire as chief executive officer of the company in January 1998.
A report on Form 8-K was filed on May 6, 1997, reporting under
"Item 5. Other Events." that the company was served with an action
entitled State of Illinois, ex rel. Louis H. Mueller vs. Walgreen
Corporation, Case No. 96L02373, which was filed in the Circuit
Court of Cook County, Illinois.
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)
Dated July 10, 1997 /s/R.L. Polark
R.L. Polark
Senior Vice President
(Chief Financial Officer)
Dated July 10, 1997 /s/R.H. Clausen
R.H. Clausen
Controller
(Chief Accounting Officer)
10
INDEX TO EXHIBITS
DOCUMENTS FILED WITH THIS REPORT
Exhibit 10 Walgreen Co. Management Incentive Plan Amendment No. 1, effective
April 9, 1997.
Exhibit 27 Financial Data Schedule
WALGREEN MANAGEMENT INCENTIVE PLAN
AMENDMENT NO.1
I
Paragraph 3.g. of The Plan shall be amended effective April 9,
1997, to read as follows:
"3.g. In the event that the Company experiences any
extraordinary items of profit or loss, the Finance Committee of the
Board of Directors will recommend to the Compensation Committee
which will, in turn, make its recommendations to the full Board of
Directors whether such extraordinary items will be included in or
excluded from the bonus calculations, and a report of the Board of
Directors' decision will be delivered in writing to the Chief
Accounting Officer of the Company."
II
In all repects, except as otherwise set forth, the Plan shall
remain in full force and effect.
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED MAY 31, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<RECEIVABLES> 364,860
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