The initial intent of this analysis was to identify changes in accounting methods within the financial statements of Walgreens and CVS Caremark, as well as to compare and contrast their financial statements, in order to draw conclusions about which company had also have better earnings. However, in the process of this analysis, with the exception of a minor change to lease accounting by Walgreens, there were no major changes in accounting methods identified. In examining the financial statements for these two drugstore industry leaders, the analysis shows that while each company conducts retail drugstore operations in similar ways, their business models for carrying out these operations greatly vary. These variances in business model led the analysis to focus on earnings from operations, operations costs, balance sheet analysis, cash flow analysis, inventory accounting, debt financing and market analysis. Of the differences that were explored, it was their level of conservatism that most separated these two companies. Walgreens chooses a more conservative approach to their operations by growing organically, while CVS Caremark assumes a riskier business model by growing through acquisitions. This fundamental difference in the two organizations cascades throughout their financial statements in the form of debt for CVS Caremark which is offset by growth of margins and profits; and in the form of a much healthier balance sheet for Walgreens. This analysis shows the results of each company’s operations, the ramification of those operations on their financial statements, and the conclusion that because of their more conservative, less risky business model, Walgreens maintains a healthier operation, despite equally impressive growth by both companies. Ultimately, the value of each company is left for the investors to determine. The data, however, shows that CVS Caremark is trying to win the earnings race for drugstore / retail operations and takes advantage of contract dispute between Walgreens and UPMC Health Plan's pharmacy.
Walgreens statistics shows best investment opportunity for long term period while CVS Caremark may be fruitful for short term basis.
On a comparable revenue basis during fiscal 2011, CVS Caremark generated net revenues of $107.100 billion, compared to Walgreen net revenues of $72.184 billion. Although CVS Caremark CAGR (compound annual growth rate) over the past 4 years was 6.98%, slightly higher than Walgreens 6.93%, the increase was primarily driven by the same store sales, the inclusion of the Longs Acquisition, as well as net revenue from new stores and a positive impact related to the growth of our Maintenance Choice program. Walgreens has expanded organically via new store openings, while CVS has undertaken a strategy of acquiring competitors.
From an earnings perspective, not only are they a larger company by revenues, but Walgreens is also run more efficiently, leading to higher profitability. This is evidenced by a net income margin (Net Income / Sales) of 3.76% during 2011, compared to CVS Caremark net income margin of 3.23% during 2011, indicating that for every $1 of sales, Walgreens earns $0.0376 while CVS only earns $0.0323 per dollar of sales. Following table shows the movement in net income and margin between both companies over time. Net income is the resulting capital after expenses are paid.
$ in million
Net Margin Ratio
The significance of these table and chart is to expose an increase and decrease in net income of CVS Caremark and Walgreens over the same period, Walgreens net income increased in fiscal year 2011 by $0.623billion than fiscal year 2010, while CVS...