Walgreens Profile

COMPANY PROFILE

Walgreen Co.

REFERENCE CODE: 677870BB-5E8C-4002-8197-6193F34D8E92PUBLICATION DATE: 9 Jan 2015www.marketline.comCOPYRIGHT MARKETLINE. THIS CONTENT IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED OR DISTRIBUTED.

TABLE OF CONTENTS

Company Overview..............................................................................................3

Key Facts...............................................................................................................3

Business Description...........................................................................................4

History...................................................................................................................5

Key Employees...................................................................................................14

Key Employee Biographies................................................................................15

Major Products and Services............................................................................16Revenue Analysis...............................................................................................21

SWOT Analysis...................................................................................................22

Top Competitors.................................................................................................27

Company View.....................................................................................................28

Locations and Subsidiaries...............................................................................32

Walgreen Co. Page 2 MarketLine

Walgreen Co.TABLE OF CONTENTS

COMPANY OVERVIEW

Walgreen Co. (Walgreen or 'the company') is one of the largest retail pharmacy chains in the US.The company's product offering includes prescription drugs, non-prescription drugs and generalmerchandise. Walgreen is headquartered in Deerfield, Illinois and employed approximately 251,000people, of whom approximately 76,000 were part-time employees, as of August 31, 2014.

The company recorded revenues of $76,392 million in the financial year ended August 2014 (FY2014),an increase of 5.8% over FY2013.The operating profit of the company was $4,194 million in FY2014,an increase of 6.4% over FY2013.The net profit was $1,932 million in FY2014, a decrease of 21.1%compared to FY2013.

KEY FACTS

Walgreen Co.Head Office108 Wilmot RoadDeerfieldIllinois 60015USA1 847 914 2500Phone

Fax

http://www.walgreens.com/Web Address76,392.0Revenue / turnover

(USD Mn)AugustFinancial Year End251,000Employees


Walgreen Co.Company Overview

BUSINESS DESCRIPTION

Walgreen is a US-based retail drugstore chain. It offers products and services through drugstores,as well as through mail, by telephone, online and mobile application. As of August 31, 2014, thecompany operated 8,309 locations in 50 states, the District of Columbia, Puerto Rico and US VirginIslands.

In FY2014, the company operated through a single business segment: retail drugstore.

Walgreen's retail drugstores sell prescription and non-prescription drugs as well as generalmerchandise, including household items, convenience and fresh foods, personal care, photofinishingand beauty care products. The company's pharmacy, health and wellness services include retail,specialty, infusion and respiratory services, mail service, convenient care clinics and wellness centers.The company, through its subsidiary Take Care Health Systems, manages in-store convenient careclinics, with more than 400 locations throughout the US. As of August 31, 2014, Walgreen operateda net retail selling space of 89 million square feet.

Walgreen procures merchandise from several domestic and foreign suppliers. The retail storeoperations are supported by 19 distribution centers, of which 13 sites are company-owned. Thesedistribution centers operate with nearly 11 million square feet of space. The distribution centers areequipped with modern systems for order processing control and rapid merchandise delivery to stores.Apart from these, Walgreen also utilizes public warehouses and third party wholesalers to handlecertain distribution needs. The company operates 34 principal office facilities, of which 13 sites areowned. These office facilities operate with nearly three million square feet of space. The companyoperates two mail service facilities with total space of approximately 237 thousand square feet. Thecompany also owns 16 strip shopping malls with approximately 500 thousand square feet of space.


Walgreen Co.Business Description

HISTORY

Charles Walgreen purchased the Chicago drugstore, where he had worked as a pharmacist andstarted the Walgreen chain in 1901. By 1916, the company had opened nine stores and it wasincorporated as Walgreen Co. The company's stock was issued to the public in 1927. Walgreenacquired the Mexican retailer Sanborn's in 1946. In the 1950s, Walgreen built self-service insteadof clerk service stores in the Midwest. By 1953, Walgreen was the largest self-service retailer in thecountry. The company entered the Puerto Rican market in 1960.

In 1981, the first Intercom computers were installed in five Walgreen pharmacies in Des Moines,Iowa. This was the initial step toward making Walgreen the first drugstore chain to connect all itspharmacy departments via satellite.Walgreen opened its 1,000th store in 1984 at Chicago. A decadelater, the 2,000th store was opened in Cleveland. In 1999, Walgreens.com, a comprehensive onlinepharmacy, was launched. In addition, the site provided Mayo Clinic Health Information, a source ofhealth and wellness information.

Walgreen reached the 3,000-store mark with the opening of its store in Halsted and Monroe, Chicagoin the year 2000.The company became the first drugstore chain to offer prescription labels in multiplelanguages in 2002. Walgreen opened its 4,000th store at Coldwater Canyon Avenue and MagnoliaBoulevard in Van Nuys, California in 2003.

The company opened its 5,000th store in Richmond in 2005. In the same year, Walgreen completedthe acquisition of Home Pharmacy of California, one of the largest independent home infusioncompanies. Walgreen Specialty Pharmacy, a business unit of Walgreen, completed the purchaseof Schraft's Specialty Pharmacy, a provider of advanced fertility medications and services, in 2005.In the same year, the company acquired select assets of Cleveland based Medic Drugstores. Inaddition, WellCare Health Plans entered into a co-branding alliance with Walgreen Health Initiatives,a wholly owned subsidiary of Walgreen, for Medicare Part D Prescription Drug Plans.

Walgreen acquired from Bristol-Myers Squibb, the rights to the brand name Theragran-M, amultivitamin, in the US in 2005. The company also partnered with Beverly Hills cosmetic surgeonDr. Jan Adams and launched the Dr. Jan Adams Women of Color Total Skin Care System. In thesame year, the company entered into a joint venture with Senior Healthcare Partners to extend itspharmacy services to senior living facilities.

In 2006, Walgreen allowed ImaginIt, a Denver based clean energy solutions company, to own andoperate solar electric systems at 96 of its stores and two distribution centers in California and 16stores in New Jersey. In the same year, the company built a new distribution center in Windsor,Connecticut. Take Care Health, an operator of retail based healthcare, opened 10 Health CornerClinics in Walgreen drugstores at Kansas City in 2006.

The company acquired CV Medical Solutions in 2006. In the same year, the company completedthe acquisition of Medmark Specialty Pharmacy Solutions. Walgreen completed its merger with


Walgreen Co.History

Happy Harry's pharmacy chain and acquired C&M Pharmacy in 2006.Walgreen and Joslin DiabetesCenter, the global leader in diabetes research, entered into an alliance to improve health outcomesfor Americans with diabetes. In the same year, the company launched Zeno, a medical device usedto treat acne. Later in 2006, inkjet printer cartridge refills were made available in 1,500 Walgreen'sphotofinishing counters across the US.

The company acquired Bradley's Center Pharmacy and OneFannin Pharmacy in Houston in 2006.Both pharmacies specialize in fertility therapies. In the same year, Walgreen launched the newfashion jewelry line, The Pure Allure Crystal Collection, made with Swarovski crystal. Also in 2006,Take Care Health, an operator of convenient care clinics, in collaboration with Walgreen, openedfour Health Corner Clinics inside Chicago area. In addition, RediClinic, the largest provider of retailhealth screening services in the US, started 16 Atlanta area Health Corner Clinics in Walgreendrugstores.

Walgreen announced a new stock repurchase program of up to $1 billion in 2007, which the companyintended to execute over the next four years. In the same year, the company entered into anagreement to acquire selected assets of pharmacy and medical specialty product provider,Familymeds Group, for approximately $60 million in addition to certain real estate leases.

Later in 2007, the company completed the acquisition of Take Care Health Systems in the US. Inthe same year, Walgreen opened its 12th full-service distribution center in Anderson, South Carolina.The distribution center was built to support the company's expansion throughout the Southeast USregion.

Walgreen completed the acquisition of OptionCare, a provider of specialty pharmacy and homeinfusion services from a network of more than 100 pharmacies in 34 states of the US, in 2007. Theacquisition positioned Walgreen as the largest home infusion therapy provider in the US. Throughthe acquisition, Walgreen became the fourth-largest specialty pharmacy provider in the US. In thesame year, Walgreen acquired TabSafe Prescription Services, the pharmacy services division ofTabSafe Medical Services. The deal expanded the company's ability to provide pharmacy servicesto senior-living communities in Tampa, Florida. In the course of acquisition, the company gainedaccess to a new market, Atlanta.

In 2008, Walgreen entered into an agreement with DHL, an express delivery and logistics company,to offer shipping services in all of its stores. During the year, the company acquired 20 drugstoresin Puerto Rico from Farmacias El Amal, a family-owned chain of 61 drugstores.

Casual Gear, a new apparel line featuring casual basics for men and women, was introduced in thecompany's stores in 2008. In the same year, Walgreen Specialty Pharmacy, a wholly owned subsidiaryof Walgreen, launched a HIV-focused website, HIV.Walgreens.com, to expand the availability ofHIV/AIDS information to patients and caregivers.

Further in 2008, the company acquired I-trax, the parent company of CHD Meridian Healthcare anda provider of integrated workplace health and productivity management solutions; and privately-heldWhole Health Management, an operator of on-site and near-site employer sponsored clinics, health


Walgreen Co.History

and wellness centers, and pharmacies in the US. In the same year, Walgreen partnered with Googleto provide Walgreen pharmacy patients access to their prescription history through Google health.In the same year, the company resolved federal and state investigations related disputes overMedicaid reimbursements for three drugs the company dispensed at its pharmacies.

The company acquired CuraScript Infusion Pharmacy based in Louisville, a wholly-owned subsidiaryof Express Scripts, in 2008. Walgreen's OptionCare entered into a joint venture with Mednow, ahome infusion, respiratory and medical equipment services company and an affiliate of CatholicHealth Initiatives. Also in 2008, Health Initiatives won First Medical Pharmacy Benefit contract toprovide claims processing, specialty pharmacy services, network management and a suite of clinicalprograms designed to meet the needs of First Medical and its members.

Later in 2008, Take Care Health Systems, a wholly-owned subsidiary of Walgreen, opened fourTake Care Clinics at Walgreen drugstores in Indianapolis, two stores in Louisville and four stores inPhoenix. In the same year, Premera companies awarded a contract to Walgreen to provide specialtypharmacy services to its 1.7 million health plan members. Longs Drug Stores Corp declined the offermade by Walgreen to acquire its outstanding shares in the company during the year and the Boardof Directors of Longs voted in favor of CVS Health's (formerly CVS Caremark) proposed acquisitionbid.

Walgreen acquired McKesson Corporation's specialty pharmacy during 2008.The acquisition furtherstrengthened Walgreen's position as the fourth-largest specialty pharmacy in the country. In thesame year, Walgreen recalled 173 teddy bears with chocolate bars sold in stores since late September2008. Certain samples of the chocolate provided with the teddy bears were contaminated withmelamine.

In the beginning of 2009, Walgreen, as part of its 'Rewiring for Growth' initiative, announced that itwould offer early retirement and severance programs to employees in corporate and field managementpositions. In the same year, the company announced that it would launch an employer centricpharmacy, health and wellness program, 'Complete Care and Well-Being'.The program was designedto reduce healthcare and prescription costs for employers across the country. Further in the year,Walgreen signed an agreement to purchase 12 Rite Aid locations, including seven in San Franciscoand five in eastern Idaho.

Drug Fair entered into an agreement with a subsidiary of Walgreen to sell all of its assets associatedwith 32 of its stores, in 2009. Earlier, Drug Fair and its parent company, CDI Group, had filed voluntarypetitions for reorganization under Chapter 11 of the US Bankruptcy Code in the US BankruptcyCourt. Also in 2009, Walgreen opened a new distribution center in Windsor, Connecticut. Thecompany acquired the home infusion operations of Air Products Healthcare and its respiratory therapyand home medical equipment operations in western Pennsylvania and Chicago in 2009, through itssubsidiary Option Care Enterprises.

In 2009, Walgreen entered into a joint venture with Vanderbilt Medical Center, a Nashville-basedcomprehensive healthcare facility and a major patient referral center for the mid-South. The joint


Walgreen Co.History

venture, located in Brentwood, Tennessee, operates under the Vanderbilt Home Care name, andis affiliated with Walgreen Infusion and Respiratory Services.

In early 2010, Walgreen acquired the pharmacy business and certain other assets of 25 Synder'sstores in Minnesota. The company was also awarded accreditation from URAC, a healthcareaccrediting organization that establishes quality standards for the healthcare industry, in the specialtypharmacy segment. Subsequently in 2010, Walgreen acquired three El Amal pharmacies in PuertoRico and also completed the acquisition of the assets of 12 Eaton Apothecary pharmacies in theBoston area from D.A.W, a subsidiary of Nyer Medical Group.Walgreen also acquired certain assets,specifically prescription files, from SpecialtyScripts, a subsidiary of Cardinal Health. The companyalso entered into an agreement with USA Drug to acquire the prescription files and certain otherassets of 17 Ike's and Super-D drugstores in the Memphis area.

Further in 2010, Option Care Enterprises, Walgreen's subsidiary, won a $223,150 federal contractfrom the US Department of Veterans Affairs' Medical Center in Oklahoma for providing medicalservices. In the same year, the company acquired Duane Reade Holdings, including 258 DuaneReade stores in the New York City metropolitan area, as well as Duane Reade's corporate officeand two distribution centers.

Later in 2010, Walgreen launched an expanded food selection in 10 Chicago stores to address areasthat lack access to basic foods necessary to maintain a healthy diet. The company redesigned itsstores to include more than 750 new food items including fresh fruits and vegetables, frozen meatsand fish, pasta, rice, beans, eggs, whole grain cereals and other healthy meal components.

Walgreen advanced the use of technology by launching several new features including 'PrescriptionText Alerts', which notify customers via text message when their prescriptions are ready, in 2010.The company also re-launched its iPhone application and the mobile site m.walgreens.com. Laterin the year, Walgreen and Omnicare announced a transaction in which Omnicare will acquiresubstantially all of the assets of Walgreen long-term care pharmacy business. In exchange, Walgreenwill acquire substantially all of the assets of Omnicare's home infusion business. In the same year,Walgreen also entered into a definitive agreement with Graymark Healthcare to acquire GraymarkHealthcare's assets of 18 ApothecaryRx pharmacies located in Colorado, Oklahoma, Minnesota,Missouri and Illinois.

In 2011, Take Care Health Systems and Ochsner Health System partnered to harness the benefitsof clinical collaboration and improve patient access to convenient and affordable health care optionsin the greater New Orleans region. In the same year, Walgreen entered into a definitive agreementto acquire substantially all of the assets of 10 Carle RxExpress pharmacies in east central Illinoisfrom The Carle Foundation.

Walgreen completed the acquisition of drugstore.com in mid-2011. The acquisition included allwebsites directly owned and operated by drugstore.com, as well as its corporate office and customerservice and distribution center operations. Around the same time, Walgreen and NorthwesternMemorial Physicians Group (NMPG) of Chicago announced a new coordinated healthcare programaimed to improve patient care and reduce healthcare costs. The program was implemented for


Walgreen Co.History

Walgreen and Northwestern Memorial employees with NMPG as their primary care provider.Walgreenalso introduced a Web Pickup service, allowing customers to order online and pick up the sameorder from neighborhood stores within an hour. The service was rolled out throughout the Chicagoarea.

Later in 2011, Walgreen surpassed one million fans on Facebook. The company also integrated itsnetwork of more than 7,700 drugstores through mobile platforms like Foursquare and FacebookPlaces. In the same year, the company announced the conversion or opening of about 1,000 FoodOasis stores over the next five years. This announcement was in conjunction with efforts by FirstLady Michelle Obama and the Partnership for a Healthier America against childhood obesity epidemicand to provide better food options and easily available healthcare to under-served communities.Take Care Health Systems introduced a new feature on their website (www.takecarehealth.com),through which patients can access information such as estimated wait times, quality of care andcost of services at Take Care Clinics across the country.

Walgreen launched its private brand, Nice, across the country in 2011. This brand included morethan 400 grocery and household items priced up to 30% below other national brands.

Walgreen, along with the US Department of Health and Human Services (HHS), the Centers forDisease Control and Prevention (CDC) and the Centers for Medicare and Medicaid Services (CMS)announced the effort to fight heart disease with Million Hearts Initiative in Washington, District ofColumbia in 2011. This initiative is to prevent one million heart attacks and strokes over the nextfive years by finding ways to reduce the number of people who need treatment and improve thequality of treatment for those who need it. Walgreen with its 26,000 health care providers wouldsupport the Million Hearts prevention goal by providing blood pressure testing, at no charge, inconsultation with a Walgreen pharmacist or Take Care Health providers. Later in 2011, Walgreenintroduced Refill Reminder Text Alerts, a mobile feature which delivers text messages informingpatients about when the existing prescription is due for refill.

In early 2012, Walgreen opened its new two story flagship store at the corner of State and Randolphon Chicago's State Street. During the same time, Take Care Health Systems introduced the optionof scheduling appointments online or through touch screen kiosks in the clinic. In addition, the websitetakecarehealth.com provides information on the cost of services offered along with patient satisfactionscores and market-specific quality related scores. Walgreen acquired the prescription files andinventory from 33 Kmart pharmacies in 16 states in 2012. The company transferred the pharmacypatient files to nearby Walgreen pharmacies.

Walgreen and location based social networking site Foursquare introduced a mobile coupon programthroughout the country in 2012. Consumers who check-in to any Walgreen store in the countrythrough foursquare on their smartphone will instantly receive a unique coupon which can be scannedand is redeemable in the store, with no texting, reply or other steps required. The company alsointroduced other mobile features like Pill Reminder and Transfer by Scan. The Pill Reminder mobilefeature is exclusively for iPhone users, and can be used to track medication schedules and receivealerts on basis of nine different reminder options like daily, hourly, weekly and other customizableselections. The Transfer by Scan mobile feature is used by the iPhone and Android users to transfer


Walgreen Co.History

prescription from another pharmacy to Walgreen with two simple steps. In the same year, Walgreenannounced the usage of Surescripts' Clinical Interoperability to electronically deliver patient data tothe primary care providers.

Also in 2012, Take Care Health Systems and Tufts Health Plan opened BeWell Center, a workplacehealth center offering wellness and preventive care, symptom care, and laboratory services to TuftsHealth Plan employees and contractors. Walgreen launched a new online 'Find Your Pharmacist'tool in 2012, allowing customers to select a pharmacist by matching their healthcare needs.

In the same year, the company added six medications to its oral oncology cycle management programat Walgreen Specialty Pharmacy. Around the same time, the company completed the acquisition ofcertain assets of BioScrip's community specialty pharmacies and centralized specialty and mailservice pharmacy businesses.

The company announced an extended, multi-year agreement with OptumRx, a pharmacy benefitmanager in the US, in 2012. The agreement provides continued, long-term access to Walgreen'spharmacy services at more than 7,800 locations nationwide for members of prescription drug benefitplans managed by OptumRx. In the same year, Walgreen and Alliance Boots, a health and beautyretailer in Europe, entered into a strategic transaction, under which Walgreen would investapproximately $6.7 billion in cash and stock (comprised of $4 billion in cash and 83.4 million shares)in exchange for a 45% equity ownership stake in Alliance Boots.The company would have the optionto proceed to a full combination by acquiring the remaining 55% of Alliance Boots in approximatelythree years.

Further in 2012, Walgreen signed a multi-year pharmacy network agreement with Express Scriptsthat includes rates and terms under which Walgreen would participate in Express Scripts' retailpharmacy network available to new and existing clients.

The company acquired a regional drugstore chain in the mid-South region of the US from StephenL. LaFrance Holdings and members of the LaFrance family in 2012. The transaction included 144stores that operate under the USA Drug, Super D Drug, May's Drug, Med-X and Drug Warehousenames located in Arkansas, Kansas, Mississippi, Missouri, New Jersey, Oklahoma and Tennessee.The acquisition also included corporate offices, a distribution center located in Pine Bluff, Arkansas,and a wholesale and private brand business.

Walgreen launched the 'Taylor Swift Store at Walgreens, offering a wide range of products fromTaylor Swift's branded merchandise line, in 2012. In the same year, Walgreen set up a new company,jointly owned with Alliance Boots, as part of their strategic partnership's synergy program. The newcompany, called Walgreens Boots Alliance Development GmbH, is based in Bern, Switzerland.

The company launched the 'Ology' brand of healthy home products, later in 2012.The Ology brandedproducts include baby care (lotion and 2-in-1 body wash), laundry (liquid detergent and fabricsoftener), cleaners (glass cleaner and all-purpose cleaner) and personal care (adult shampoo andconditioner). These branded products also include light bulbs and paper products that are 100%tree-free and made from readily renewable resources.


Walgreen Co.History

Walgreen acquired a significant ownership stake in Cystic Fibrosis Foundation Pharmacy, the parentcompany of Cystic Fibrosis Services, in late 2012. Following the transaction, Walgreen and the CFFoundation became the joint owners of two businesses: CF Services, a specialty pharmacy for CFpatients and their families; and Pharma Dynamics, a provider of new product launch support andcall center services for drug manufacturers. During the same time, Walgreens Infusion Services wasselected as a contracted provider of a new injectable medication, Gattex, for short bowel syndrome.

The company opened a worksite health center on the BMW Manufacturing's campus in Spartanburg,South Carolina in 2013. The 25,000 square feet facility, managed by Walgreens Employer SolutionsGroup, will provide BMW associates, dependents and eligible retirees a wide range of health services,including primary and occupational care. In the same year, Take Care Health Systems and CommunityHealth Network announced a clinical collaboration that will facilitate more coordinated health careservices.

Walgreen and Alliance Boots entered into a long-term partnership with AmerisourceBergen, apharmaceutical services company, in 2013. This partnership will enable Walgreen, Alliance Bootsand AmerisourceBergen to collaborate on programs to improve service levels and efficiencies, whilereducing costs and increasing patient access to pharmaceuticals. Walgreen and Alliance Boots willalso have rights to acquire minority equity position in AmerisourceBergen. During the same time,the company selected OMD to be its new media planning and buying agency of record. OMD willbe responsible for the US and Puerto Rico activity related to traditional, multicultural, digital andmobile media planning and buying. Further in 2013, Walgreen opened its New York City-basedflagship store located in the Empire State Building.

Further in 2013, Walgreen extended its agreement as a network pharmacy provider in the CVSHealth (formerly CVS Caremark) pharmacy benefit management (PBM) national retail network. Inthe same year, Walgreen and Chicago-based solar developer SoCore Energy announced that theywill build more than 200 new solar installations at Walgreen drugstores throughout California,Connecticut, Delaware, Massachusetts, New Jersey and New York. This latest expansion will bringthe number of completed solar installations at Walgreen stores to more than 350. Also in 2013, thecompany began selling No7 Men skincare products, created by Boots, at Walgreen and DuaneReade drugstores. Later in 2013, Walgreen launched its app for mobile phone devices across theWindows Phone 8 platform.

In the same year, Walgreen expanded vaccine availability at all of its 204 locations across Indiana.Earlier in the year, a bill was passed in the state authorizing pharmacists to provide all adolescentand adult immunizations recommended by the Centers for Disease Control and Prevention (CDC)with a prescription. In the same year, Mark Hill Salon Professional products were launched atWalgreen and Duane Reade stores. Further in 2013, Walgreen introduced its 'Healthcare Clinic' atselect Walgreen stores as the new branding for the more than 370 in-store retail clinics, replacingthe former Take Care Clinic name.

Community Health Network began its clinical collaboration with the Healthcare Clinic at selectWalgreen locations in 2013, to offer seamless healthcare in a convenient and accessible manner inIndiana. In the same year, Walgreen and Orlando Health, a not-for-profit health care organization,


Walgreen Co.History

announced a clinical collaboration that will provide coordinated and expanded health care services,while improving patient access to convenient and affordable care throughout Central Florida. Alsoin the same year, AmerisourceBergen launched the previously announced 10-year relationship todistribute pharmaceuticals to more than 8,100 Walgreen locations across the country.Theranos andWalgreen announced a long-term partnership, under which Walgreen stores will operate TheranosWellness Centers to offer Theranos' new lab testing service.

The company acquired certain assets of Kerr Drug's retail drugstores and specialty pharmacybusiness in 2013.The acquisition included Kerr Drugs retail drugstores, specialty pharmacy businessand a distribution center.

Later in 2013, Walgreen launched Balance Financial, a full suite of integrated financial serviceswhich are built around its new Balance Financial Prepaid MasterCard. In the same year, the companyopened its first net zero energy retail store in Evanston, Illinois.

In January 2014, the company expanded its relationship with Inovalon, a technology company, toimplement its patient assessment tool and technology platform to support improvements in care,quality and risk score accuracy programs across more than 400 Healthcare Clinic at select Walgreenlocations.

In the following month, Walgreen and the Accreditation Association for Ambulatory Health Care(AAAHC) announced that more than 50 primary care worksite health centers managed by TakeCare Employer Solutions (a division of the company that provides workplace health solutions),received medical home accreditation. In March 2014, Walgreen, along with Lebhar-FriedmanPublishing, launched a beauty publication, named Discover Beauty Within.This quarterly publicationwill be available at all Walgreen locations, except in Puerto Rico, and Duane Reade drugstores.

Walgreen signed a definitive agreement with Water Street Healthcare Partners (Water Street), astrategic investor focused exclusively on the health care industry, in April 2014. According to theagreement, Water Street will acquire a majority interest in Take Care Employer Solutions. In thesame month, the company expanded its travel health services to include immunizations andconsultations.

In August 2014, Walgreen entered the Dallas-Fort Worth market, thereby expanding its network ofHealthcare Clinic retail locations.

In the following month, the company announced that Walgreens Boots Alliance, the anticipated newholding company for the combined Walgreen and Alliance Boots enterprise, filed a RegistrationStatement on Form S-4 with the Securities and Exchange Commission (SEC). This includespreliminary proxy statement/prospectus related to the companys acquisition of the remaining 55%of Alliance Boots and the reorganization of Walgreen into a holding company structure.

In October 2014, Walgreen partnered with WebMD Health Corp. to improve health and wellness inAmerica by providing WebMDs virtual wellness-coaching programs directly to Walgreen customers.


Walgreen Co.History

In the same month, the company announced the availability of Apple Pay at Walgreen and DuaneReade drugstores across the US.

The company acquired the remaining 55% equity ownership stake in Alliance Boots in December2014.With this acquisition, Walgreen and Alliance Boots completed the second step of their strategicpartnership. The new entity, Walgreens Boots Alliance, will trade on the NASDAQ stock exchangeunder the symbol WBA. Under a reorganization merger agreement, Walgreen became a wholly-ownedsubsidiary of Walgreens Boots Alliance and its common stock was converted automatically intoshares of Walgreens Boots Alliance common stock. The new global enterprise combines Walgreen,one of the largest drugstore chains in the US; Boots, a market leader in European retail pharmacy;and Alliance Healthcare, one of the leading international wholesalers and distributors.


Walgreen Co.History

KEY EMPLOYEES

BoardJob TitleNameSenior ManagementPresidentAlexander W. Gourlay


Walgreen Co.Key Employees

KEY EMPLOYEE BIOGRAPHIES

Alexander W. Gourlay

Board: Senior ManagementJob Title: PresidentSince: 2014Age: 54

Mr. Gourlay has been the President at Walgreen since 2014. He is also an Executive Vice Presidentat Walgreens Boots Alliance. Previously, he served as an Executive Vice President and the Presidentof Customer Experience and Daily Living at Walgreen. Before joining the company in 2013, Mr.Gourlay was the Chief Executive Officer of the Health and Beauty Division at Alliance Boots from2009 to 2013. Prior to 2009, he served as the Managing Director of Boots UK and as a member ofthe Alliance Boots Group operating committee following the acquisition of Alliance Boots by ABAcquisitions in 2007. Mr. Gourlay also served as the Healthcare Director at Boots the Chemists,having previously held senior management positions in store operations and human resources.


Walgreen Co.Key Employee Biographies

MAJOR PRODUCTS AND SERVICES

Walgreen is one of the largest retail pharmacy chains in the US. The company's key products and services include the following:

Products:

Beauty:

Facial skin care productsHair care productsMakeup productsPerfume and cologneBath and body productsSun care productsClothing and accessoriesNatural and organic beauty products

Personal care:

Oral careShaving and groomingHair carePregnancy and fertilityHome tests and monitoringFeminine careIncontinenceFoot careEye careEar, nose and throat careLip careMassage and relaxationBath and bodyDeodorant and antiperspirantSun careNatural and organic personal care

Contact lenses:

Color lensesDaily disposablesMonthly disposablesMultifocal lensesToric lenses


Walgreen Co.Major Products and Services

Vial lensesWeekly disposables

Medicines and treatments:

Cough, cold and fluPain relief and managementAllergy and sinusDigestive health and nauseaChildren's health careHome tests and monitoring Stop smokingSkin ailmentsHomeopathic remediesFirst aidPill organizationEye careEar, nose and throat careFoot careSleep and snoring aidsSupports and bracesFeminine careIncontinence

Home healthcare solutions:

Lift chairsScootersWheelchairs and transport chairsWalkers and rollatorsCanes and crutchesMobility equipment accessoriesBathroom safetyHome tests and monitoringDaily living aidsDiabetes managementMedical nutritionIncontinenceBedding and accessoriesPain relief and managementMastectomySupports and bracesMedical scrubs and clothingAir care

Vitamins and supplements:



MultivitaminsLetter vitamins A-KHerbsCalcium and mineralsSupplementsFish oil, omegas and efasProbioticsChildren's vitamins and supplementsHomeopathic remediesSexual wellness supplementsPill organization

Grocery:

Candies and gumsSnacksBeveragesFresh and readyPantryRefrigerated foodsFrozen foodsHealth foods and sports nutritionSpecialty dietsBaby food and formulaGiftable foods

Baby, kids, and toys:

Baby food and formulaFeeding essentialsDiaperingBath, skin and hairChildproofing and safetyChildren's health careChildren's vitamins and supplementsBaby gearNurseryClothing and accessoriesToysParty suppliesJust for momPregnancy and fertilityNatural and organic

Household products:



Laundry and cleaningPaper and plasticSmall appliancesKitchen essentialsSchool and office suppliesBed and bathParty suppliesCandles and home fragranceLightbulbs and lightingAir careFrames and photo albumsElectronicsLighters and accessoriesClothing and shoe careTravelScrapbookingBatteriesOutdoor livingAuto and hardwarePest control

Diet and fitness products:

Weight managementSports nutritionBars and drinksDiet foodsExercise equipmentYoga and pilatesFitness accessoriesSports medicine

Seasonal products:

CostumesGift cardsHoliday decorParty suppliesGiftable foods

Services:

Clinical services:

Laboratory monitoring



Medication profile reviewNutritional assessments Patient and caregiver education

Home infusionRespiratory services PhotofinishImmunization

Brands:

Walgreen Nice!Good & Delish



REVENUE ANALYSIS

Overview

Walgreen recorded revenues of $76,392 million in FY2014, an increase of 5.8% over FY2013. ForFY2014, the US, Guam, Puerto Rico and the US Virgin Islands, the company's only geographicmarket, accounted for 100% of the total revenues.

In FY2014, the company operated through one reportable segment, the retail drugstore business.However, the company has provided a revenue break-up based on product categories: prescriptiondrugs (64% of the total revenues in FY2014), general merchandise (26%) and non-prescription drugs(10%).

Revenues by product category

In FY2014, the prescription drugs category recorded revenues of $48,890.9 million, an increase of7.5% over FY2013.

The general merchandise category recorded revenues of $19,861.9 million in FY2014, an increaseof 1.9% over FY2013.

The non-prescription drugs category recorded revenues of $7,639.2 million in FY2014, an increaseof 5.8% over FY2013.

Revenues by geography

The US, Guam, Puerto Rico and the US Virgin Islands, Walgreen's only geographical market,accounted for 100% of the total revenues in FY2014. Revenues from the US, Guam, Puerto Ricoand the US Virgin Islands reached $76,392 million in FY2014, an increase of 5.8% over FY2013.


Walgreen Co.Revenue Analysis

SWOT ANALYSIS

Walgreen is one of the largest retail pharmacy chains in the US. The company has an extensivestore network in the country. Nearly 76% of the US population lives within five miles of a Walgreenstore. An extensive store network increases the company's accessibility to customers and expandsits potential consumer base. However, rising labor wages in the US could increase the operatingcosts of the company and have an adverse effect on its margins.

WeaknessesStrengths

Involvement in various legal issuesEstablished drugstore retail networkincreases market penetration opportunitiesWide portfolio of pharmacy and healthcareservices increases average spending

ThreatsOpportunities

Rising labor cost in the US affects thecompany's margins

Increased popularity of retail clinics due toaccessibility and affordability

Intense competition and changes inregulations may affect the profitability andmarket share

Growing trend in private label marketGrowing personal care market in the USMerger with Alliance Boots

Nationwide spread of prescription drugabuse

Strengths

Established drugstore retail network increases market penetration opportunities

Walgreen is one of the largest drugstore chains in the US with an extensive store network. As ofAugust 2014, approximately 76% of the US population lived within five miles of a Walgreen storeand an average of 6.2 million shoppers visited the company's stores daily in FY2014. Additionally,Walgreen has the highest number of stores compared to its key competitors, CVS Health and RiteAid. As of August 31, 2014, the company operated 8,309 locations in 50 states, the District ofColumbia, Puerto Rico and US Virgin Islands. In comparison, as of December 31, 2013 CVS Healthoperated 7,660 retail drugstores. On the other hand, Rite Aid operated 4,587 stores in 31 statesacross the US and in the District of Columbia as of March 1, 2014. Strong retail network allowsWalgreen to serve a broad base of customers. In FY2014, the company filled approximately 699million prescriptions.


Walgreen Co.SWOT Analysis

Furthermore, Walgreen was ranked among the 500 America's largest companies and Global 500largest companies list by a business magazine in 2014.Thus, an extensive store network increasesthe company's accessibility to customers and expands its potential customer base. Additionally,greater accessibility positions Walgreen as a preferred store for customers which will be a competitiveadvantage.

Wide portfolio of pharmacy and healthcare services increases average spending

Walgreen offers an extensive range of pharmacy and healthcare related services that complementeach other. The company's portfolio of services increases the potential customer base for its retailbusiness operations.Walgreen offers pharmacy, health and wellness solutions such as retail, specialtypharmacy, infusion and respiratory services, mail service and convenient care clinics.The companysdrugstores sell prescription and non-prescription drugs and its pharmacists also provide drugconsultations and administer flu vaccines and other immunizations. Its integrated network ofpharmacies allows easy access for customers to fill their prescriptions at any of its drugstores.Furthermore, Take Care Health Systems, a wholly-owned subsidiary, manages the HealthcareClinics at select Walgreen locations throughout the country. The company also offers specialtypharmacy services, providing customers a variety of medications, services and programs for managingcomplex and chronic health conditions. Furthermore, through its infusion therapy services, thecompany offers administration of intravenous (IV) medications for cancer treatments, chronic pain,heart failure, and other infections and disorders which must be treated by IV. The company alsoprovides laboratory monitoring, medication profile review, nutritional assessments and patient andcaregiver education services. Walgreen provides these infusion services at home, at the workplace,in a physician's office or at a Walgreen alternate treatment site, resulting in an expanded customerbase for the company's pharmacy services.

Walgreen's wide portfolio of pharmacy and healthcare services provide the company with anopportunity to increase the average spend of the customer to drive top line growth.

Weaknesses

Involvement in various legal issues

The company has been involved in various legal issues in the recent past. For instance, in 2012, anumber of California District Attorneys filed a complaint in the Alameda County Superior Courtalleging certain violations of the state's hazardous waste regulations.This was related to the disposalof various materials from the company's retail stores.The lawsuit sought injunctive relief, civil penaltiesand certain fees and expenses. Also in 2012, the US Drug Enforcement Administration (DEA) servedadministrative inspection warrants on six Walgreen retail pharmacies in Florida and removed certaincontrolled substance prescription records and other related documents. DEA also served an inspectionwarrant and an administrative subpoena for records on the Walgreen distribution center in Jupiter,Florida. DEA issued a separate administrative subpoena for records from the Walgreen facility inOrlando, Florida in the same year. Further in 2012, DEA served a suspension order on the Jupiterdistribution center and placed under seal the controlled substance inventory at that facility.



Furthermore, in 2013, the company entered into a settlement and memorandum of agreement withthe US Department of Justice and DEA, through which it settled and resolved all administrative andcivil matters arising out of DEA's concerns relating to the company's distribution and dispensing ofcontrolled substances. Under the terms of the agreement, Walgreen paid an $80 million settlementamount, yielded its DEA registrations for six pharmacies in Florida until May 26, 2014, and for itsJupiter, Florida distribution center until September 13, 2014, and agreed to implement certain remedialactions.

Involvement in such litigations not only harms the company's brand image but also erodes consumerconfidence in its products. In addition, the damages paid are substantial and are counterproductive.

Opportunities

Increased popularity of retail clinics due to accessibility and affordability

Retail clinics are walk-in clinics located in pharmacies or grocery stores. Growing number of customershave been using the facilities offered by these retail clinics as these clinics offer several advantages.Low cost entry points and extended hours of operations compared to hospitals are the key factorsdriving the growth of retail clinics. The demand for convenient healthcare at affordable prices isexpected to further drive the growth in this segment. According to industry estimates, the numberof retail clinics in the US is expected to grow from approximately 1,400 in 2012 to 2,700 by 2016.Walgreen operates retail clinics in several of its pharmacies. The increased demand for retail clinicservices will trigger higher revenues in this segment and will also increase the potential customerbase for the company.

Growing trend in private label market

The private label market in the US is expected to grow at a fast pace. Preference for private labelshas been increasing in the US as consumers have become price conscious and see the qualitydifference between private label and branded products narrowing. Even upper-income shoppers aremore willing to buy generic brand, which has traditionally appealed more to shoppers with limitedbudgets. According to industry estimates, store brands sales outpaced national brands in 2013 andgrew by more than 2% compared to 2012. In supermarkets, unit and dollar shares increased tonearly 23% and 19%, respectively, and in drug stores, unit and dollar shares increased to nearly17% and 16%, respectively.The growth trend for private labels is expected to continue in the comingyears with consumers intending to continue purchasing private labels even after the economyimproves.

Walgreen launched its private brand Nice! across the country in 2011. Another private label brandDuane Reade's Good & Delish is also offered in Walgreen stores. Thus, through its varied offeringsin the private label category, the company can enhance its appeal to consumer segments that areincreasingly opting for private label goods.



Growing personal care market in the US

The personal care products market in the US experienced a moderate growth in the recent past.According to MarketLine, the personal products market in the US grew by 1.6% in 2013 to reach avalue of $54,840.1 million. However, the market is estimated to experience a significant growth ratein the future. By 2018, this market is forecast to have a value of $58,675.8 million, an increase of7% since 2013. Skincare is the largest segment of the personal products market in the US, accountingfor 17.8% of the market's total value.

Walgreen offers a wide range of personal care products under various categories such as oral care,hair care, feminine care, foot care, eye care and skin care, among others.Therefore, with the growingdemand for personal care products in the US, the company can improve its sales.

Merger with Alliance Boots

In December 2014, Walgreen acquired the remaining 55% equity ownership stake in Alliance Bootsto create the worlds first global pharmacy-led, health and well-being enterprise. Under a reorganizationmerger agreement, Walgreen became a wholly-owned subsidiary of the new entity, named WalgreensBoots Alliance. The new global enterprise combines Walgreen, one of the largest drugstore chainsin the US; Boots, a market leader in European retail pharmacy; and Alliance Healthcare, one of thelargest international wholesalers and distributors. Together, Walgreens Boots Alliance spans morethan 25 countries, with over 12,800 stores and more than 340 pharmaceutical distribution centersserving more than 180,000 pharmacies and other points of care. This merger also brings togethera brand portfolio of retail, wholesale, service and product brands, along with the worlds largestpharmaceutical wholesale and distribution network, and will position Walgreens Boots Alliance asthe worlds largest buyer of pharmaceuticals. In addition, with its equity method investments,Walgreens Boots Alliance has a retail pharmacy network spanning the US and Europe as well askey markets in Latin America and Asia, with growth opportunities in many developing and underservedmarkets across the world. Therefore, becoming global gives the company an ability to generatesignificant and sustainable benefits for local markets and all stakeholders, from consumers andpatients, to pharmacists, suppliers and business partners.

Threats

Rising labor cost in the US affects the company's margins

Labor costs are rising in the US. Tight labor markets, increased overtime, government mandatedincreases in minimum wages and a higher proportion of full-time employees are resulting in anincrease in labor costs for employers in the US. The federal minimum wage rate in the US, whichremained at $5.15 per hour since 1998, increased to $5.85 per hour in 2008. It further increased to$6.55 per hour in 2009 and to $7.25 per hour in 2010. Furthermore, many states and municipalitiesin the country have minimum wage rate even higher than $7.25 per hour due to higher cost of living.The minimum wage rate has increased in the states of Arizona (from $7.8 in 2013 to $8.05 in 2014),



Colorado (from $7.78 in 2013 to $8.23 in 2014), Florida (from $7.79 in 2013 to $8.05 in 2014),California (from $8 in 2013 to $9 in 2014), Oregon (from $8.95 in 2013 to $9.25 in 2014) andWashington (from $9.19 in 2013 to $9.47 in 2014) in the recent past. Increasing wage rates andrelated costs could affect the company's profitability.

Intense competition and changes in regulations may affect the profitability and market share

The company operates in a highly competitive industry. As a pharmacy retailer, Walgreen competeswith various retailers, including chain and independent drugstores, mail order prescription providers,grocery stores, convenience stores, mass merchants, Internet pharmacies, warehouse clubs, dollarstores and other discount merchandisers. It competes on factors like service, convenience, varietyand price. In addition, some of these competitors may offer services and pricing terms that Walgreenmay not be willing or able to offer. This may have an adverse effect on the company's profitabilityand market share. Some of the companys key competitors include CVS Health, Rite Aid, Safeway,and The Kroger Co. In addition, the company also competes with mass market retailers like Wal-Mart,which is also expanding its drug retailing operations. Wal-Mart is the world's largest retailer withmore than 11,000 stores in 27 countries; these stores also have a health and wellness department,offering pharmacy services, optical services and over-the-counter drugs.

Growing competition from Walgreens competitors along with their significant resources could havea major impact on the pricing and margins of their offerings. This may put compounded pressure onthe companys drug margins and lower its profits. Also, intense competition from drug retailing chainsand mass market retailers could strain the company's margins and affect its profitability.

Nationwide spread of prescription drug abuse

Prescription drug abuse has become one of the fastest growing problems in the US market, particularlyin cities such as Los Angeles, Miami, Chicago and New York. Previously, Marijuana was primarilyused by the first-time drug abusers in the country, but of late, it has been replaced by prescriptiondrugs. According to the 2013 National Survey on Drug Use and Health published by the SubstanceAbuse and Mental Health Services Administration, an estimated 6.5 million persons aged 12 andover, or 2.5% of the US population, were non-medical users of prescription-type psychotherapeuticdrugs. In addition, stealing legitimate shipments, and recruitment of Medicare beneficiaries who selltheir monthly drug supplies, by illegal traffickers, are some of the routes used to bring prescriptiondrugs onto the streets.The growing abuse of prescription drugs can affect the sales revenue of drugretailers such as Walgreen.



TOP COMPETITORS

The following companies are the major competitors of Walgreen Co.

Safeway Inc.Target CorporationWal-Mart Stores, Inc.Rite Aid CorporationThe Kroger Co.CVS Health Corporation


Walgreen Co.Top Competitors

COMPANY VIEW

An excerpt from the Management's Discussion and Analysis of Financial Condition and Results ofOperations section is given below. The statement has been taken from the companys 10-K filingfor FY2014.

RESULTS OF OPERATIONS

Fiscal 2014 net earnings attributable to Walgreen Co. decreased 21.1% to $1.9 billion, or $2.00 perdiluted share, versus net earnings of $2.5 billion, or $2.56 per diluted share, in fiscal 2013. Thedecrease was primarily attributable to lower gross margins, a loss related to the Alliance Boots calloption and a higher effective tax rate, partially offset by higher sales, lower selling, general andadministrative expenses as a percentage of sales, increased equity earnings in Alliance Boots andincreased gains on fair market value adjustments related to the AmerisourceBergen warrants.Included in net earnings and net earnings per diluted share, respectively, were the negative impactsof an $866 million, or $0.90 per diluted share, loss on the Alliance Boots call option; $238 million,or $0.25 per diluted share, in acquisitionrelated amortization; $179 million, or $0.18 per diluted share,of store closure and other optimization costs; $167 million, or $0.17 per diluted share, in AllianceBoots related tax; $86 million, or $0.09 per diluted share, of LIFO provision; and $54 million, or $0.06per diluted share, of acquisition-related costs. Net earnings in fiscal 2014 were positively impactedby $351 million, or $0.36 per diluted share, from the combined fair value adjustments and amortizationrelated to both our and Alliance Boots warrants to purchase AmerisourceBergen common stock and$6 million, or $0.01 per diluted share, from the gain on sale of the Take Care Employer Solutions,LLC business. Included in fiscal 2013 net earnings and net earnings per diluted share, respectively,were the negative impacts of $241 million, or $0.25 per diluted share, in acquisition-relatedamortization; $151 million, or $0.16 per diluted share, of LIFO provision; $124 million, or $0.13 perdiluted share, in Alliance Boots related tax; $60 million, or $0.06 per diluted share, ofacquisition-related costs; $47 million, or $0.05 per diluted share, relating to a legal settlement withthe Drug Enforcement Administration (DEA); $24 million, or $0.03 per diluted share, in costs relatedto Hurricane Sandy; and $8 million, or $0.01 per diluted share, in costs related to the completion ofa pharmaceutical distribution contract. Net earnings in fiscal 2013 were positively impacted by $110million, or $0.12 per diluted share, from the combined fair value adjustments and amortization relatedto both our and Alliance Boots warrants to purchase AmerisourceBergen common stock and $13million, or $0.01 per diluted share, from an additional gain on the 2011 sale of the Walgreens HealthInitiatives, Inc. business relating to a client retention escrow.

Net sales increased by 5.8% to $76.4 billion in fiscal 2014 compared to an increase of 0.8% in 2013and a decrease of 0.8% in 2012. Net sales growth in fiscal 2014 was attributed to new store salesand an increase in comparable drugstore sales over the prior year. In fiscal 2013, sales were positivelyimpacted by our decision to rejoin the Express Scripts pharmacy provider network and the acquisitionof USA Drug and BioScrip assets, both of which were partially offset by lower comparable storesales. Sales in comparable drugstores increased 4.9% in 2014 compared to decreases of 1.3% and3.6% in 2013 and 2012, respectively. Comparable drugstores are defined as those that have beenopen for at least twelve consecutive months without closure for seven or more consecutive days


Walgreen Co.Company View

and without a major remodel or a natural disaster in the past twelve months. Relocated and acquiredstores are not included as comparable stores for the first twelve months after the relocation oracquisition. We operated 8,309 locations (8,207 drugstores) at August 31, 2014, compared to 8,582locations (8,116 drugstores) at August 31, 2013 and 8,385 locations (7,930 drugstores) at August31, 2012.

Prescription sales increased 7.9% in 2014 compared to an increase of 0.4% in 2013 and a decreaseof 3.1% in 2012. Comparable drugstore prescription sales increased 6.8% in 2014 compared todecreases of 1.7% and 6.1% in 2013 and 2012, respectively. The effect of generic drugs, whichhave a lower retail price, replacing brand name drugs reduced prescription sales by 1.3% for 2014,5.3% for 2013, and 3.5% for 2012, while the effect on total sales was 0.7% for 2014, 3.0% for 2013and 1.9% for 2012. New generic drug introductions have led to an increased proportion of genericson total net sales. Third party sales, where reimbursement is received from managed careorganizations, the government, employers or private insurers, were 96.5% of prescription sales in2014, 95.8% of prescription sales in 2013, and 95.6% of prescription sales in 2012. We receivemarket-driven reimbursements from third party payers, a number of which typically reset in January.The total number of prescriptions filled (including immunizations) was approximately 699 million in2014, 683 million in 2013 and 664 million in 2012. Prescriptions adjusted to 30-day equivalents were856 million in 2014, 821 million in 2013 and 784 million in 2012.

Front-end sales increased 2.1% in 2014, 1.5% in 2013 and 3.6% in 2012. The increase over theprior year was due, in part, to new store openings and improved sales related to non-prescriptiondrugs, convenience and fresh foods, photofinishing products and personal care. Front-end saleswere 35.8% of total sales in fiscal 2014, 37.1% of total sales in fiscal 2013 and 36.8% of total salesin fiscal 2012. Comparable drugstore front-end sales increased 2.0% in 2014 compared to a decreaseof 0.7% in 2013 and an increase of 0.6% in 2012. The increase in fiscal 2014 comparable front-endsales was primarily attributable to an increase in basket size partially offset by lower customer traffic.

Gross margin as a percent of sales was 28.2% in 2014, compared to 29.3% in fiscal 2013. Grossmargin in fiscal 2014 was negatively impacted by lower retail pharmacy margins primarily from lowerthird-party reimbursement; the increase in Medicare Part D mix and the strategy to continue driving90-day prescriptions at retail; fewer brand-to-generic drug conversions compared with the prior yearperiod; generic drug inflation on a subset of generic drugs; and the mix of specialty drugs, whichcarry a lower margin percentage. Front-end margins were negatively impacted in the photofinishing,non-prescription drug and convenience and fresh foods categories. Pharmacy and front-end margindecreases were partially offset by purchasing synergies realized from the joint venture formed byWalgreens and Alliance Boots and a lower provision for LIFO in fiscal 2014. Gross margin as apercent of sales was 29.3% in fiscal 2013 and 28.4% in fiscal 2012. Gross margin in fiscal 2013 waspositively impacted by higher retail pharmacy margins, where the impact of new generics more thanoffset lower market driven reimbursements, improved front-end margins primarily from thenon-prescription drug, personal care and beauty care categories and a lower LIFO provision comparedto fiscal 2012.

Gross profit dollars in fiscal 2014 increased 2.1% over the prior year. The increase is primarilyattributed to increased sales and a lower LIFO provision which was partially offset by lower retail



pharmacy margins. Gross profit dollars in fiscal 2013 increased 3.8% over fiscal 2012, primarilyattributed to higher retail pharmacy margins.

We use the last-in, first-out (LIFO) method of inventory valuation. The LIFO provision is dependentupon inventory levels, inflation rates and merchandise mix. The effective LIFO inflation rates were1.5% in 2014, 2.7% in 2013 and 3.3% in 2012, which resulted in charges to cost of sales of $132million in 2014, $239 million in 2013 and $309 million in 2012. Inflation on prescription inventory was14.0% in 2014, 10.7% in 2013 and 10.0% in 2012. As a result of declining inventory levels, the fiscal2014, 2013 and 2012 LIFO provisions were reduced by LIFO liquidations of $187 million and $194million and $268 million, respectively.

Selling, general and administrative expenses were 23.6% of sales in fiscal 2014, compared to 24.3%of sales in fiscal 2013. As a percentage of sales, expenses were lower primarily due to lower storecompensation costs, store occupancy costs and headquarters costs, partially offset by costs relatedto our store optimization plan. Selling, general and administrative expenses as a percentage of salesincreased to 24.3% in 2013 as compared to 23.6% in 2012.The increase was primarily due to higheroccupancy expense, investments in strategic initiatives and capabilities and store salaries attributableto new store growth, which were partially offset by lower expenses associated with our investmentin Alliance Boots as compared to 2012.

Selling, general and administrative expense dollars increased $449 million, or 2.6% over fiscal 2013.The growth is attributable to 1.5% of store closure and other optimization costs, 1.3% of new storeexpenses, and 0.5% of comparable store and headquarter expenses.These increases were partiallyoffset by a reduction in acquisition related costs and acquisition-related amortization, each of whichwere lower by 0.1%. In addition, certain nonrecurring costs were incurred in the prior year, each ofwhich contributed to a lower growth rate in the current year including Hurricane Sandy of 0.2%, legalcosts related to the DEA settlement last year of 0.2% and costs related to the completion of apharmaceutical distribution contract of 0.1%. Selling, general and administrative expense dollars infiscal 2013 increased 3.9% over fiscal 2012. The increase was attributable to new store expensesof 2.4%, 0.5% from USA Drug operations, 0.2% of comparable store and headquarter expenses,0.2% from Hurricane Sandy, 0.2% in acquisition-related amortization, 0.2% in costs related to theDEA settlement, 0.1% from acquisition-related costs and 0.1% in costs related to the completion ofa pharmaceutical distribution contract.

Earnings in the 45% Alliance Boots equity method investment for fiscal 2014 were $617 millioncompared to $344 million last year. Alliance Boots earnings are reported on a three-month lag. Thetwelve month period ended August 31, 2013 only included 10 months (August 2012 through May2013) results of operations of Alliance Boots reflected in the equity earnings in Alliance Boots dueto the timing of this investment. Earnings included amortization expense resulting from the fair valueof certain Alliance Boots assets of $42 million and $57 million in fiscal 2014 and 2013, respectively.Fiscal 2013 amortization included $23 million related to inventory fair value adjustments.

Interest was a net expense of $156 million in fiscal 2014, $165 million in fiscal 2013 and $88 millionin fiscal 2012. Interest expense for fiscal 2014, 2013 and 2012 was net of $6 million, $7 million, and$9 million, respectively, which was capitalized to construction projects.The decrease in 2014 interest



expense was due to the repayment of the $550 million notes that matured in March 2014 and the$1.3 billion notes that matured in August 2013, partially offset by higher interest charges related toincremental capital and finance lease obligations. The increase in interest expense from fiscal 2012to 2013 was due to the $4.0 billion note issuance in September 2012, partially offset by the fixed tovariable interest rate swaps on our $1.0 billion 5.250% notes and the repayment of our $1.3 billion4.875% notes in August 2013.

Other non-operating expense was $481 million in fiscal 2014 versus income of $120 million lastyear. In fiscal 2014, we recorded a loss of $866 million related to the Alliance Boots call option.Partially offsetting the loss was an increase of $366 million in the fair value of the AmerisourceBergenwarrants and $19 million for the amortization of the deferred credit associated with the initial valueof the warrants.The increase in the fair value of the warrants was primarily attributable to the increasein the price of AmerisourceBergen's common stock. Other income in fiscal 2013 included an increasein the fair value of the AmerisourceBergen warrants and amortization of the deferred credit of $111million and $9 million, respectively.

The effective income tax rate was 42.9% for fiscal 2014, 37.1% for fiscal 2013 and 37.0% for 2012.The increase in the effective tax rate from fiscal 2013 was primarily attributed to the loss associatedwith the Company's option to purchase the remaining equity interest in Alliance Boots, which did notgenerate a tax benefit in fiscal 2014, partially offset by the favorable impact of additional foreignsource income taxed at lower rates.The loss will be, in part, a capital loss for tax purposes for whichthe Company did not have any capital gains to offset against and has recorded a full valuationallowance. The capital loss on the Alliance Boots call option is available to be carried forward andoffset against future capital gains through fiscal 2020. The increase in the effective tax rate fromfiscal 2012 compared to fiscal 2013 was primarily attributed to higher non-tax deductible permanentdifferences.



LOCATIONS AND SUBSIDIARIESHead OfficeWalgreen Co.108 Wilmot RoadDeerfieldIllinois 60015USAP:1 847 914 2500http://www.walgreens.com/

Other Locations and Subsidiaries

Walgreens StoreWalgreens Store2000 East Colfax Avenue9301 Highway 119DenverAlabasterColorado 80218Alabama 35007USAUSA

Walgreens StoreWalgreens Store385 Versailles Road2285 South Apple StreetFrankfortBoiseKentucky 40601Idaho 83706USAUSA

Walgreens StoreWalgreens Store1096 Highway 3321-23 Stanhope StreetHamiltonBostonNew Jersey 08690Massachusetts 02116USAUSA

Walgreens StoreWalgreens Store1162 Harrisburg Pike41 Holland AvenueColumbusAlbanyOhio 43223New York 12208USAUSA

Walgreens StoreWalgreens Store702 Trosper Road Southwest1804 Charlotte AvenueTumwaterNashvilleWashington 98512Tennessee 37203USAUSA


Walgreen Co.Locations and Subsidiaries

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