1. WALGREEN CO. Matt Byford Brandon Honey Shivam Khanna Joe Vaccaro October 28, 2008

2. Agenda ► Company Overview ► Macroeconomic Overview ► Industry Overview ► Recent Developments ► Forecasting/Expectations ► Valuation of Walgreens ► Recommendation

3. Company Overview ► Founded in 1901 by Charles Walgreen  1 st store was in Chicago ► 226,000 employees as of 8/31/2007 ► Goal is to have 7,000 stores open by 2009

4. Company Overview ► Walgreen company operates retail drug store chains that are engaged in the retail sale of prescription drugs, non-prescription drugs, and general merchandise. ► In 2008, it opened 561 net new stores for a total of 6443 Walgreens in 49 states, District of Columbia, and in Puerto Rico. ► It is the fastest growing retailer in the US, and is the 2 nd largest drugstore chain behind CVS. ► Ranked 44 th on the Fortune 500 list of the largest US-based companies. ► On the list of Fortune’s magazine’s Most Admired Companies in America for the last 14 consecutive years.

5. Company Overview ► A.G. McNally  Chairman of the Board since 2008  Chief Executive Officer since 2008  Board member sine 1999 ► Gregory Wasson  President and Chief Operating Officer since 2007 ► Jeff Rein retired in October 2008  Chairman and Chief Executive officer since 2003 ► William Rudolphsen  Senior Vice President and Chief Financial Officer since 2004, new role as Chief Risk Officer ► Has been with Walgreens since 1977

6. Decline in Consumer Confidence Macroeconomic Overview CCI hit all time low in June 2008 (51)

7. Macroeconomic Overview ► Oil continues to be volatile, but lower prices will have positive impact on economy ► Cost to do business will be lower

8. Strategy ► Organic store growth ► Relocate, remodel ► Densely-populated areas like Southern California and Northeast ► Invest heavily in high-tech store and distribution systems which drive service up and costs down ► Acquisitions where there are synergies ► Healthcare offerings beyond that of a traditional pharmacy  Offer an online drugstore web site totally integrated with retail stores  Take Care Healthcare Systems ► Increase market share in front-end of stores ► Must continue to find ways to leverage the benefits of scale without losing the ability to react quickly to changes in customer needs

9. Strategy ► Growth  Walgreens is currently increasing their net stores operated by approximately 1 store every 16 hours  The company, which currently operates 6,443 stores, plans to operate at least 7,000 stores by 2009 ► See room for organic growth to 13,000 stores

10. Innovations ► Introduced freestanding stores in early 1990s with drive thru pharmacies ► Today, more than 80% of Walgreen Co.’s stores have drive thru pharmacies ► Nation-wide 1 hour photo service ► Available at more than 98% of stores ► Touch tone prescription refills ► 50% of people live within 2 miles of a Walgreens

11. Drug Store Industry ► Highly Competitive Industry  Competition with other drugstore chains, independent drugstores, mail order prescription providers, internet pharmacies  Other competitors include various grocery stores, mass merchants, and dollar stores ► Main competitors:  CVS Corp. (CVS)  Rite Aid Corp. (RAD)  Wal-Mart (WMT) ► Pharmaceutical more than grocery department ► Now offers a $4 generic prescription plan  Drugstore.com

12. RCMP Position ► Own 500 shares in Walgreens ► Purchased at $25/share on 10/06/1999 ► Sold 500 shares at $49.94/share on 9/14/2006 ► Cost Basis is $12,500 ► Stock is now trading at $21.40/share ► Valued at $10,700 ► Represents 2.4% of portfolio market value ► Unrealized Loss of $1,800 or 14.4%

13. Shareholder Base ► 67% of shares owned by institutional investors ► 125,000 shares sold by insiders in last 6 months

14. Correlation

15. Business Drugstores Prescription drugs Nonprescription Drugs General merchandise Take care Health clinics Home infusion Therapy provider Specialty pharmacy

16. Product class ► Prescription sales continue to become a larger portion of the company’s business.  Aging population  Introduction of lower priced generics (Medicare D)  R&D of innovative drugs 2008200720062005 Prescription66%65%64%64% Non-prescription10%10%11%11% General Merchandise 24%25%25%25%

17. Walgreen Outlook ► Advantages : Good reputation / quality Good reputation / quality Convenience of locations: High market share Convenience of locations: High market share Economies of scale Economies of scale Aging population Aging population ► Risk factors:  Peaking generic drug cycle:  Store saturation/cannibalization  Competition from CVS/Caremark, Wal-Mart  Diverging from original growth strategy

18. Porters Five Forces: Retail Drug Industry ► Rivalry: High  Competitive Industry  Direct mail pharmacy benefit managers  Grocery stores & big box retailers ► Threat of Substitutes: Low  Few alternative choices for products sold at Walgreens/Drug Retailers ► Bargaining Power of Buyers: Moderate  Insurance companies  Walgreens receives premium prices for front end convenience items ► Bargaining Power of Suppliers: Moderate  Watch government regulations / upcoming election ► Barriers to Entry: Moderate  High initial capital expenditures & supplier relationship required

19. Comparables WAG CVS RAD WMT Industry Market Cap: 21.18B35.05B379.52M195.40B2.56B Qtrly Rev Growth: 8.80%2.10%-1.10%10.40%13.40% Revenue:59.03B84.90B26.44B397.38B6.20B Gross Margin: 28.19%20.39%27.31%24.47%27.31% EBITDA:4.28B6.65B708.66M29.79B505.83M Oper Margins: 5.83%6.43%0.53%5.83%4.87% Net Income: 2.16B3.06B-1.44B13.39BN/A EPS:2.1662.036-1.783.3610.74 P/E:9.8811.99N/A14.7813.64 PEG:0.760.79N/A1.30.86 P/S:0.380.470.020.510.41 Source: Yahoo Finance

20. 1 Yr. Stock Performance Source: Yahoo Finance

21. 5 Yr. Stock Performance Source: Yahoo Finance

22. Longs Bid Withdrawal ► Competitive action vs. Failed action  Caused CVS to overvalue Longs  CVS must pay $71.50 per share  Most likely has to access debt ► Challenging debt market ► CVS must pay a penalty if it cannot access financing

23. Longs Bid Withdrawal ► Longs is exposed to the poor condition of the CA market ► Longs would have few synergies with WAG ► WAG did not want to risk its credit rating  Senior unsecured debt was downgraded anyway from AAA to AA ► EBIT coverage ratio fell because of increase in LT debt ► Uncertainty of strategic direction ► CEO Jeff Rein retired

24. Expectations ► Prescription sales will grow ► Specialty Pharmacy sales will become a greater part of the business ► 7000 th store will open FY 2009 ► Organic store growth will begin slowing in 2011  Increases flexibility  Slower sales growth ► Promotional activity will be moderated ► People will return to their doctors as the economy recovers

25. Generic Drugs Expectations ► Greater use of generic drugs as baby boomers retire and receive a fixed income ► A significant amount of brand name drugs are expected to come off of patent between 2009-2011  Currently, WAG is in a valley ► There were few brand name drugs coming off of patent in 2008  Expect a peak within the next 3 years

26. Expectations ► A new CEO is expected to lead Walgreens  Upside potential ► Possible political effects with more affordable health care coming from different plans

27. Valuation – DCF Analysis ► Cost of equity = 7.6% ► Cost of debt = 5.36% ► Wacc = 7.35% ► Long term growth = 3% ► Stock Price = 23.55

28. Comparable’s data ► Strong profitability margins; expected decline over 5 years ► Strong Return on Equity, Return on Asset numbers; expected decline ► Implied growth through PEG ratio lower than industry average ► P/E ratio is lower than market and industry average

29. EVA Analysis ► Strong Return on Average Invested Capital, expected decline going forward

30. Recommendation ► Hold the stock at this price. People have over-reacted and this has pushed the stock price down. Company is well positioned as compared to it’s peers ► New CEO could put the company back on track.