Walgreen Co. (WAG) Presented April 19, 2007

Investment Managers Jessica Boghosian Shengdong Zhu

Company Overview Incorporated in 1909, headquartered in Deerfield, Illinois. Nation’s largest drugstore based on sales Engaged in the retail sale of prescription and non- prescription drugs and general merchandise including: beauty care, personal care, household items, candy, photofinishing, greeting cards, seasonal items, and convenience foods. Recorded its 32 nd year of consecutive earnings and sales growth. During the year, Walgreen Co. had a net increase of 476 stores, totaling to 5,461 stores located in 47 states and Puerto Rico.

Company Overview Success is dependent upon continuously opening new Walgreens stores. Walgreen Co. plans to operate more than 7,000 stores by Walgreen Co. is in the business of strategically locating new stores as well as relocating/closing existing stores.

New Walgreens Co. Stores Fiscal Year# of New Stores Over the past 7 years, Walgreen Co. has opened on average 1.28 stores/day.

National Store Distribution Walgreen Co. has made it a point to open the most stores in the states that are the popular locations for aging baby boomers to retire. Image: Walgreen Co. Annual Report 2006

Product Class Attribution to Sales Fiscal Year 2006 Fiscal Year 2005 Fiscal year 2004 Prescription Drugs 64% 63% Non- Prescription Drugs 11% 12% General Merchandise 25%

Pharmacy Sales Pharmacy sales continue to become a larger portion of Walgreens’ business. Walgreens filled 529 million prescriptions in 2006, totaling to an increase of 8.1% from the 2005 fiscal year. Sales trends are expected to continue to grow for the following reasons: Aging population Introduction of lower priced generics Continued development of innovative drugs

Medicare Part D Medicare Part D is a government initiated program to subsidize the costs of prescription drugs to individuals covered by Medicare. Part D was implemented in January of Walgreens has obtained a larger share of senior citizen patients due to this program. 35% of the prescriptions filled under this program in the first eight months were new customers to Walgreens.

New Developments Dial-a-Pharmacist Available in 14 languages, this system allows customers to discover where there is a Walgreens pharmacist that speaks his or her language. Solar Power Usage 100 stores utilize solar energy, making Walgreens the largest retail user of this source of energy. Highway Signs A new federal law allows signs to be placed on highways informing drivers of the location of 24 hour pharmacies. Several have already been planted with many more to come. Source: Walgreen Co. Annual Meeting, January 2006

Corporate Risk Walgreen Co. faces intense competition with local, regional, and national companies, many of which are infiltrating Walgreens’ existing markets. Extreme competition can have an adverse affect on prices. Third-party payors of prescription drugs are attempting to reduce costs and pharmacy reimbursement rates. On February 8 th, 2006, President Bush signed the Deficit Reduction Act of 2005 This Act will ultimately reduce Medicaid reimbursement rates to retail pharmacies. Further reduction in these rates are foreseeable.

RCMP Position Originally owned 1000 shares of WAG, purchases on October 6 th, 1999 for $25.00/share. On September 20 th, 2006, 500 shares were $49.94/share for a realized gain of $12,470. Currently own 500 shares of WAG, trading at $45.96 as of April 19, 2007 for an unrealized gain of $10,480 or 83.84%.

Role in Portfolio Walgreen Co. currently comprises 7% of our portfolio.

Correlation Matrix

5-Year Growth vs. S&P 500

Competitors Who CVS/Caremark Corp. (CVS) Rite Aid Corp. (RAD) Why Industry Specific Business Segment Specific (prescription and non-prescription drugs and general merchandise)

Out-performing Its Competitors Prescription Volume WALGREEN CO.263/day Chain Drugstores180/day Mass Retailers143/day Grocery131/day Independents100/day Source: Walgreen Co. Annual Meeting, January 2006

Out-performing Its Competitors Earnings per square foot WALGREEN CO.$46 Chain Drugstores<$23 Grocery$12 Source: Walgreen Co. Annual Meeting, January 2006

1-Year Comparables

5-Year Comparables

Comparable Analysis

Assumptions Organic growth continues to be the primary growth vehicle Future growth was estimated assuming to be in line with increasing medical costs and increasing store numbers. We assume that future growth will continue at a 13% annual rate but will gradually decrease to 9% over the next five years and then remain at a 3% annual growth rate thereafter

Discounted Cash Flow Analysis ∆

Since Walgreen Co. is 100% equity financed, WACC=k e. Beta: Regression 0.1 vs. Bloomberg.66 Average =.4

Discounted Cash Flow Analysis

A Note On Capital Structure Walgreen Co. is an all equity financed firm. The company owns a mere ~18% of it’s store base. The other ~82% is leased. These leases hold Walgreen Co. responsible for $ billion, but this obligation is not seen on the balance sheet as a liability to the firm. This poses potentially risk to Walgreen Co. Lets call these lease obligations “quasi-debt.” THEREFORE, it is important to keep in mind this accounting structure when valuing WAG.

Sensitivity Analysis Most likely to range from to 57.04

Portfolio Fit Sharpe Ratio a measure of the mean excess return per unit of risk in an investment asset or a trading strategy Including WAG generates a higher Sharpe Ratio

RCMP Fall ’06 Decision 500 Shares of WAG were sold last semester at $ Why? Lease Obligations WACC was adjusted upward based on the risk of outstanding lease obligations After this adjustment, the company appeared to be trading at a “significantly inflated price that, in the long term, could not be sustained.”

Recommendation HOLD. Why? Healthy management vision Stable, growing company Solid performer Leader in its class But what about these lease obligations and other business risks!? Acknowledge that every company has risk, with Wagreen Co. as no exception. We have already taken action as conservative investors by selling 500 shares.