Cvs Vs. Walgreens

Part I Introduction and Financial Analysis

Both CVS Corporation and Walgreen Company operate retail drug stores in the United States. In addition to having pharmacies and selling prescription and non-prescription drugs both retailers also sell general merchandise. This includes items like beauty and cosmetic products, convenience foods, household items and film & photofinishing services.

Walgreens is the more established and older of the two companies. It was founded in 1901 and until recently it added stores from mostly internal organic growth. CVS is the newer company and started in 1963. The majority of growth at CVS has come from acquisitions of other companies like Revco, Arbor Drug, Eckerd and more recently Sav-On and Osco Drug Stores. Walgreens and CVS operate more than 5,000 chain stores each throughout the United States over 5,200 retail outlets each.

The major income statement changes for Walgreens the past two years are in the following areas. Net sales increased nearly $5 billion dollars from $37.5 billion in 2004FY to $42.2 billion in 2005FY while net income increased from $1.35 billion to $1.56 billion within the same period. It should be noted from Walgreens income statements the cost of sales increased 11% from $27.31 billion (2004FY) to $30.41 billion (2005FY). Selling general & administrative expenses rose from $8.06 billion in 2004FY to $9.36 billion in 2005FY.

On their balance sheet Walgreens showed an increase of assets in the following areas. Net property and equipment went from $5.45 billion in 2004FY to $6.17 billion in 2005FY a 13% jump. Inventories had an even greater percentage leap going from $4.74 billion to $5.59 billion over the two fiscal years or an 18% increase. Accounts receivable increased by more than $200 million or 19% вЂ" $1.17 billion in 2004 to $1.40 billion in 2005. A noticeable asset declining was short-term investments; it went down by 60% from $1.25 billion in 2004FY to $495 million in 2005FY.

In the area of liabilities and shareholders’ equity the following significant changes occurred. Accounts Payable increased from $2.64 billion in 2004FY to $2.92 billion during 2005FY. Accrued expenses and other liabilities went from $1.37 billion to $1.49 billion over the same two fiscal years or a 9% increase. Other non-current liabilities increased at an even faster percentage rate (17%) from $850 million in 2004FY to $998 million. Retained earnings had a significant increase from 2004 to 2005. It went from $7.5 billion in 2004FY to $8.8 billion in 2005FY or a 16% change. In 2005 Walgreens also spend more on purchasing back their own stock ($515 million dollars) nearly 12 million shares vs. 2 million shares ($76 million dollars) in 2004.

As far as CVS their income statement had the following key changes in the past two fiscal years. Net sales grew over 20% from $30.59 billion in 2004FY to $37 billion during 2005FY while net income increased 33% from $918.8 million to $1.22 billion. On the expense side the cost of goods and selling general & administrative costs went up significantly as well. Cost of goods for CVS in 2004FY were $22.56 billion, while in 2005FY it was $27.11 billion a 20% increase. The general & administrative costs went up at 20% also from $6.08 billion to $7.29 billion or a 23% jump.

The balance sheet for CVS reflected an overall increase in net property and equipment from $3.51 billion during 2004FY to $3.95 billion in 2005FY. Total inventory increased from $5.45 billion to $5.72 billion in the two fiscal years. On the opposite side intangible assets went down from $867.9 million during 2004FY to $802.2 million during 2005FY or an 8% drop. Goodwill was another asset item that decreased from $1.9 billion (in 2004FY) to $1.79 billion (in 2005FY) or a 6% drop.

In the area of liabilities and shareholders’ equity the following changes should be pointed out. Accounts payable increased nearly $200 million over the two fiscal years, going from $2.28 billion to $2.47 billion. Also moving up from 2004 to 2005 were retained earnings ($5.65 billion to $6.74 billion) and capital surplus $1.69 billion to $1.92 billion). Going in the opposite direction were two liabilities. Long term debt went down from $1.91 billion during 2004FY to $1.57 billion in 2005FY while accrued expenses dropped from $1.67 billion to $1.52 billion over the same period.

Both Walgreens and CVS are showing generally favorable news on their financial statements the past two fiscal years. Walgreens increase in sales and net income though not as accelerated as CVS is quite steady. Walgreens net sales have gone up nearly 13% while net income has increased about 16%. For CVS the increase has been more dramatic, net sales are up 20% between 2004 and 2005 while net income has gone up 33% during this time period.

Conversely the cost of goods and general & administrative expenses are increasing faster for CVS than Walgreens. CVS cost of goods and general & administrative expenses between the two fiscal years went up 20% (over $4.5 billion in COGS, and over $1.2 billion in G&A). This compares to an 11% increase in cost of goods ($3.1 billion) and 16% increase in general & administrative expenses

($1.3 billion) for Walgreens.

On total assets Walgreens is actually showing a larger percentage increase between 2004 and 2005 fiscal years than CVS. They went from $13.34 billion to $14.61 billion or a 9% increase in assets while CVS increased from $14.55 billion to $15.28 billion or a more modest jump of 5%. As far as liabilities and stockholders’ equity Walgreens reflected an increase in both areas while CVS total liabilities actually decreased from $7.56 billion during 2004FY to $6.95 billion in 2005FY. This was related to decreases in accrued expenses ($145 million), notes payable ($632 million) and long-term debt ($338 million) by CVS. On shareholders’ equity Walgreens went up a much smaller percentage than CVS, 8% ($661 million) vs. 19% ($1.44 billion).

An analysis of a few of the key financial ratios reveals the following:

RATIO 2005FY 2004FY

Return on Assets (ROA)

CVS 8% 6%

Walgreens 11% 10%

Walgreens is utilizing its assets more efficiently than CVS the past two years.

Earnings per Share

CVS $1.49 $1.13

Walgreens $1.53 $1.32

CVS earnings per

...