Walgreens: the Corporate Financial Decision Making Analysis Essay

1083 Words Oct 24th, 2008 5 Pages
Walgreens: The Corporate Financial Decision Making Analysis

Walgreens’ principal activity is to operate a chain of retail drugstores that sells prescription and nonprescription drugs. The company also carries additional product lines like general merchandise including cosmetics, food, beverages and photofinishing. Walgreens is one of the fastest growing retailers in the United States and led the chain drugstore industry in retail sales and profits last year.

The capital structure of this retail drugstore is determined by 42,5% Debt and 57,50% Equity due to $8.239 of the total debt and $11,104,30 of Equity resulting in $19,313.60 of Total Liabilities and Shareholders’ Equity for 2007. Among the main debt-financing sources,
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Walgreens is also mainly funded by store sales so the company sees long-term potential for about 13,000 U.S. stores. Additionally, the company long-term-expansion strategies are entering new markets, and improving customer service, investing heavily in technology enhancements that improve pharmacy efficiency and reduce costs.

In view of the current business, economic and industry trends, Walgreens may not be able to raise as much sales as it would like because the company has come under pressure in recent months, reflecting a slowdown in sales because of a weakening economy and intensifying competition. However, Walgreen's long-term prospects remain appealing, and the stock is attractively valued. I would calculate the optimal capital structure based on its debt/equity ratio that according to the author of Pharmacy Management Book, Shane P. Desselle, pharmacist typically have a debt-to-equity ratio of 75%, which can help to find the optimal capital structure.

However, the Walgreens’ capital structure is similar to its stronger competitor CVS’ capital structure that I defined as the benchmark. CVS has a total liabilities and shareholders’ equity of $54,721.90, where total debt is $23,400 representing the 42.76% and total equity is $31,321.90 which represents 57.24%. Moreover, if we compare 2006 results to 2007, I realize that capital structure