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 NOVEMBER 30, 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, $.15625 par value, as of December 31, 1997 was
495,203,877.
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, 1997 and
the Consolidated Condensed Statements of Earnings for the three
months ended November 30, 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
(Dollars in Millions)
(Unaudited)
November 30, August 31,
1997 1997
ASSETS
Current Assets:
Cash and cash equivalents $ 14 $ 73
Accounts receivable 353 376
Inventories 2,062 1,733
Other current assets 82 144
Total Current Assets 2,511 2,326
Property and Equipment, at cost, less
accumulated depreciation and amortization
of $790 at November 30 and $748 at
August 31 1,812 1,754
Other Non-Current Assets 130 127
TOTAL ASSETS $ 4,453 $ 4,207
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 35 $ -
Trade accounts payable 987 813
Other current liabilities 593 626
Total Current Liabilities 1,615 1,439
Non-Current Liabilities:
Deferred income taxes 94 113
Other non-current liabilities 317 282
Total Non-Current Liabilities 411 395
Shareholders' Equity:
Preferred stock $.125 par value; authorized
16 million shares; none issued - -
Common stock $.15625 par value; authorized
1.6 billion shares; issued and outstanding
495,015,237 at November 30 and
493,789,966 at August 31 77 77
Paid-in capital 54 30
Retained Earnings 2,296 2,266
Total Shareholders' Equity 2,427 2,373
TOTAL LIABILITIES & SHAREHOLDERS'
EQUITY $ 4,453 $ 4,207
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)
(Dollars in Millions Except Per Share Data)
Three Months Ended
November 30,
1997 1996
Net sales $ 3,485 $ 3,054
Costs and Deductions:
Cost of sales 2,541 2,224
Selling, occupancy and administration 801 708
3,342 2,932
Other (Income)Expense:
Interest income (1) (1)
Interest expense 1 1
- -
Earnings before income tax provision and
cumulative effect of accounting change 143 122
Income tax provision 56 47
Earnings before cumulative effect of
accounting change 87 75
Cumulative effect of accounting change for
system development costs (26) -
Net earnings $ 61 $ 75
Per Share:
Earnings before cumulative effect of
accounting change $ 0.18 $ 0.15
Cumulative effect of accounting change for
system development costs (0.05) -
Net earnings $ 0.13 $ 0.15
Dividends declared $0.0625 $0.0600
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)
(Dollars in Millions)
Three Months Ended
November 30,
1997 1996
Net cash (used for) provided by operating
activities $ (15) $ 104
Cash Flows from Investing Activities:
Additions to property and equipment (148) (95)
Proceeds from the surrender of corporate-
owned life insurance policies 58 -
Other 5 5
Net cash used for investing activities (85) (90)
Cash Flows from Financing Activities:
Cash dividends paid (30) (27)
Net proceeds from notes payable 35 42
Proceeds from (purchases for) employee
stock plans 37 (1)
Other (1) (7)
Net cash provided by financing activities 41 7
Changes in Cash and Cash Equivalents:
Net (decrease)increase in cash and cash
equivalents (59) 21
Cash and cash equivalents at beginning of year 73 9
Cash and Cash Equivalents at end of period $ 14 $ 30
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 November 30, 1997 and August 31,
1997, inventories would have been greater by $450 million and $444
million 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) All share data have been adjusted to reflect a two-for-one
stock split distributed to shareholders August 8, 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.
The weighted average number of common shares and
equivalents used for calculating primary net earnings per share was
500,926,000 and 497,509,000 for the three months ended November 30,
1997 and 1996, respectively. Fully diluted net earnings per share
are the same as primary net earnings per share.
(3) In accordance with the EITF (Emerging Issues Task Force)
consensus reached on November 20, 1997, the company is required to
change its accounting for business process reengineering costs.
EITF 97-13 "Accounting for Costs Incurred in Connection with a
Consulting Contract or an Internal Project that Combines Business
Process Reengineering and Information Technology Transformation,"
requires that the cost of business process reengineering activities
that are part of a project to acquire, develop or implement
internal use software, whether done internally or by third parties,
be expensed as incurred. Previously, the company capitalized these
costs as systems development costs.
The change, effective as of September 1, 1997, resulted in
a cumulative pretax charge of $43 million, or $.05 per share. No
restatement of prior year financial statements is required, and the
effect of this change on the current year and prior year quarters
is not material.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Earnings before accounting change for the first quarter of fiscal
1998 were $87 million or $.18 per share. This was a 16% increase
over last year. The accounting change involved expensing the
cumulative cost of business process reengineering activities that
had been capitalized as part of system development projects. After
this $26 million after-tax charge ($.05 per share), net earnings
were $61 million or $.13 per share.
Sales for the quarter ended November 30, 1997, increased by 14.1%
to $3.5 billion. 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 9.1% for the quarter. New store openings accounted for
8.2% of the quarterly sales increase. The company operated 2,390
drugstores as of November 30, 1997, compared to 2,228 a year
earlier.
Prescription sales increased 19.2% for the first quarter and were
49.4% of total sales compared to 47.2% a year ago. Prescription
sales in comparable stores increased 14.3%. 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 as a percent of sales decreased to 27.1% of sales
from 27.2% last year. 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 for both the
first quarter of fiscal 1998 and 1997 include a LIFO provision of
$6 million ($.01 per share).
Selling, occupancy and administration expenses were 23.0% of sales
in the quarter compared to 23.2% a year ago. The decrease, as a
percent to sales, was caused by lower advertising, insurance and
headquarters costs partially offset by increases in various other
store expenses. The growth in mail order pharmacy, which has a
lower expense ratio, also contributed to the decrease.
The effective tax rates were 38.75% in both periods.
FINANCIAL CONDITION
Cash and cash equivalents were $14 million at November 30, 1997,
compared to $30 million at November 30, 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 used for operating activities for the first quarter was
$15 million compared to $104 million provided by operating
activities a year ago. The change between periods was principally
due to higher inventory levels. The company's profitability is the
principal source for providing funds for expansion and remodeling
programs, dividends to shareholders and funding for various
technological improvements.
Net cash used for investing activities was $85 million versus $90
million last year. Additions to property and equipment were $148
million compared to $95 million last year. There were 58 new or
relocated drugstores opened during the first quarter of this year
and last year. There were 46 owned locations opened during the
quarter or under construction at November 30, 1997 versus 37 for
the same period last year. The chainwide installation of Intercom
Plus, an advanced pharmacy computer system, was also completed.
Capital expenditures are expected to exceed $500 million and the
company plans to open approximately 280 new stores in fiscal 1998.
During the quarter the company surrendered corporate-owned life
insurance policies resulting in net proceeds of $58 million.
Net cash provided by financing activities was $41 million compared
to $7 million a year ago. During both quarters, the company
obtained funds through the placement of short-term notes payable.
The company issued 1.2 million shares of authorized but previously
unissued shares to satisfy various stock option and purchase plan
requirements. This avoided purchasing shares on the open market
which would have resulted in cash outflows of approximately $30
million. At November 30, 1997, the company had $225 million in
unused bank lines of credit and $100 million of unissued authorized
debt securities, previously filed with the Securities and Exchange
Commission.
The company has been addressing computer software modifications or
replacements to enable transactions to process properly in the year
2000. All necessary changes are expected to occur in a timely
manner and the cost will not have a significant impact on the
ongoing results of operations.
In March 1997, Financial Accounting Board 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.
8
PART II. OTHER INFORMATION
Item. 6 Exhibits and Reports on Form 8-K
(a) Exhibits filed with this report:
27. Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the
quarter ending November 30, 1997. A report on Form 8-K was filed
on December 23, 1997, reporting under "Item 5. Other Events."
that the Registrant complied with a new required accounting
interpretation announced November 20, 1997, by the Emerging
Issues Task Force that the cost of business process reengineering
activities that are part of a systems development project be
expensed as those costs are incurred.
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 January 13, 1998 /s/R.L. Polark
R.L. Polark
Senior Vice President
(Chief Financial Officer)
Dated January 13, 1998 /s/R.H. Clausen
R.H. Clausen
Controller
(Chief Accounting Officer)
10
INDEX TO EXHIBITS
DOCUMENT FILED WITH THIS REPORT
Exhibit 27 Financial Data Schedule
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED NOVEMBER 30, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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