Edgar Filing: WALGREEN CO

SECURITIES AND EXCHANGE COMMISSION

	SECURITIES AND EXCHANGE COMMISSION
	WASHINGTON, D.C. 20549

	FORM 10-Q

(Mark One)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934

	FOR THE QUARTER ENDED MAY 31, 2002

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______to _______

	Commission File Number
	1-604

	WALGREEN CO.
	(Exact name of registrant as specified in its charter)

Illinois	36-1924025
(State of Incorporation)	(I.R.S. Employer Identification No.)

200 Wilmot Road, Deerfield, Illinois	60015
(Address of principal executive offices)	(Zip Code)

	(847) 940-2500
	(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

The number of shares issued and outstanding of the registrant's Common Stock, $.078125 par value, as of June 28, 2002 was 1,024,434,738.

Page 1 of 12

WALGREEN CO. AND SUBSIDIARIES

CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The consolidated condensed financial statements included herein have been prepared by the company pursuant to the rules and regulations of the Securities and Exchange Commission. The Consolidated Condensed Balance Sheet as of May 31, 2002, the Consolidated Condensed Statements of Earnings for the three and nine months ended May 31, 2002 and 2001, and the Consolidated Condensed Statements of Cash Flows for the nine months ended May 31, 2002 and 2001, have been prepared without audit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the company's latest annual report on Form 10-K.

In the opinion of the company the condensed statements for the unaudited interim periods presented include all adjustments, consisting only of normal recurring adjustments, necessary to present a fair statement of the results for such interim periods. Because of the influence of certain holidays, seasonal and other factors on the company's operations, net earnings for any interim period may not be comparable to the same interim period in previous years, nor necessarily indicative of earnings for the full year.

	WALGREEN CO. AND SUBSIDIARIES
	CONSOLIDATED CONDENSED BALANCE SHEETS
	(Dollars in Millions)

				(Unaudited)
				May 31,	August 31,
				2002	2001
Assets
	Current Assets:
		Cash and cash equivalents		$ 286.2	$ 16.9
		Accounts receivable		998.1	798.3
		Inventories		3,343.3	3,482.4
		Other current assets		103.8	96.3
			Total Current Assets	4,731.4	4,393.9
	Property and Equipment, at cost, less
		accumulated depreciation and amortization of
		$1,361.1 at May 31 and $1,158.0 at August 31		4,597.3	4,345.3
	Other Non-Current Assets			127.3	94.6
			Total Assets	$ 9,456.0	$ 8,833.8

Liabilities & Shareholders' Equity
	Current Liabilities:
		Short-term borrowings		$ -	$ 440.7
		Trade accounts payable		1,577.3	1,546.8
		Other current liabilities		1,157.7	1,024.1
			Total Current Liabilities	2,735.0	3,011.6
	Non-Current Liabilities:
		Deferred income taxes		181.6	137.0
		Other non-current liabilities		531.8	478.0
			Total Non-Current Liabilities	713.4	615.0
	Shareholders' Equity
		Preferred stock $.0625 par value; authorized
			32 million shares; none issued	-	-
		Common stock $.078125 par value; authorized
			3.2 billion shares; issued and outstanding
			1,024,065,819 at May 31 and
			1,019,425,052 at August 31	80.0	79.6
		Paid-in capital		736.5	596.7
		Retained earnings		5,191.1	4,530.9
			Total Shareholders' Equity	6,007.6	5,207.2
			Total Liabilities & Shareholders' Equity	$ 9,456.0	$ 8,833.8

The accompanying Notes to Consolidated Condensed Financial
Statements are an integral part of these Statements.

WALGREEN CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED)
(In Millions Except Per Share Data)

				Three Months Ended		Nine Months Ended
				May 31,	May 31,	May 31,	May 31,
				2002	2001	2002	2001

Net Sales				$7,397.9	$6,296.2	$21,445.8	$18,339.4

Costs and Deductions:
	Cost of sales			5,460.7	4,644.6	15,776.8	13,428.9
	Selling, occupancy and
			administration	1,523.1	1,306.1	4,439.5	3,850.5
				6,983.8	5,950.7	20,216.3	17,279.4
Other (Income)Expense:
	Interest income			(1.9)	(1.7)	(4.3)	(3.9)
	Interest expense			-	1.7	-	3.1
	Other income			-	-	(5.5)	(22.1)
				(1.9)	-	(9.8)	(22.9)
Earnings before income tax
	Provision			416.0	345.5	1,239.3	1,082.9
Income tax provision				157.0	132.1	467.8	414.2
Net earnings				$ 259.0	$ 213.4	$ 771.5	$ 668.7
Per share-
	Basic			$ .25	$ .21	$ .75	$ .66
	Diluted			$ .25	$ .21	$ .75	$ .65

	Dividends declared			$ .03625	$ .03500	$ .10875	$ .10500

Average shares outstanding				1,023.6	1,018.0	1,021.9	1,015.3
Dilutive effect of stock
		Options		10.3	12.9	10.0	13.4
Average shares outstanding
	Assuming dilution			1,033.9	1,030.9	1,031.9	1,028.7

The accompanying Notes to Consolidated Condensed Financial

Statements are an integral part of these Statements.

	WALGREEN CO. AND SUBSIDIARIES
	CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
	(UNAUDITED)
	(Dollars in Millions)

			Nine Months Ended
			May 31,	May 31,
			2002	2001

Net cash provided by operating activities			$ 1,181.5	$ 552.8

Cash flows from investing activities:
	Additions to property and equipment		(691.8)	(905.9)
	Net proceeds from corporate-owned life insurance
		Policies	12.7	57.5
	Disposition of property and equipment		214.7	34.9
Net cash used for investing activities			(464.4)	(813.5)

Cash flows from financing activities:
	Net (payments of)proceeds from short-term borrowings		(440.7)	357.8
	Proceeds from employee stock plans		108.0	103.9
	Cash dividends paid		(109.9)	(105.2)
	Other		(5.2)	(9.9)
Net cash (used for)provided by financing activities			(447.8)	346.6

Changes in cash and cash equivalents:
	Net increase in cash and cash equivalents		269.3	85.9
	Cash and cash equivalents at beginning of year		16.9	12.8
Cash and cash equivalents at end of period			$ 286.2	$ 98.7

The accompanying Notes to Consolidated Condensed Financial
Statements are an integral part of these Statements.

WALGREEN CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(1) Inventories are valued on a lower of last-in, first-out (LIFO) cost or market basis. At May 31, 2002 and August 31, 2001, inventories would have been greater by $703.4 million and $637.6 million respectively, if they had been valued on a lower of first-in, first-out (FIFO) cost or market basis. LIFO inventory costs can only be determined annually when inflation rates and inventory levels are finalized; therefore, LIFO inventory costs for interim financial statements are estimated. Cost of sales is primarily derived from an estimate based upon point-of-sale scanning and adjusted based on periodic inventories.

(2) The company capitalized interest expense as part of significant construction projects. The amounts capitalized were $.8 million and $8.0 million for the quarter and nine-month periods ended May 31, 2002 versus $1.8 million and $10.8 million for the comparable periods a year ago.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

RESULTS OF OPERATIONS

Net earnings for the third quarter, ended May 31, 2002, were $259.0 million or $.25 per share (diluted). This was a 21.4% increase in net earnings over last year. Net earnings for the nine months were up 15.4% to $771.5 million or $.75 per share (diluted). Year-to-date results include this year's $5.5 million pre-tax ($3.4 million after-tax) gain and last year's $22.1 million pre-tax (1 cent per share after-tax) gain for partial payments of the company's share of the brand name prescription drug antitrust litigation settlement. Excluding the gains, earnings for the nine months rose 17.3 percent to $768.0 million or 74 cents per share from last year's $655.0 million or 64 cents per share. The quarterly net earnings increase resulted from improved sales and lower expense ratios. The nine months net earnings increase resulted from improved sales and lower expense ratios, partially offset by lower gross margin rates.

Net sales increased by 17.5% in the third quarter, to $7.4 billion, and rose by 16.9% to $21.4 billion for the first nine months. Drugstore sales increases resulted from sales gains in existing stores and added sales from new stores, each of which include an indeterminate amount of market-driven price changes. Comparable drugstore (those open at least one year) sales were up 11.5% and 10.8% for the quarter and first nine months. New store openings accounted for 9.3% and 9.8% of the quarterly and nine-month sales increase. The company operated 3,766 drugstores as of May 31, 2002, compared to 3,424 a year earlier.

Prescription sales increased 21.9% for the third quarter and 21.6% for the first nine months. Prescription sales in comparable stores increased 16.7% for the quarter and nine-month periods while comparable sales in other sales categories increased 4.4% and 3.4% for the same periods. Third party sales, where reimbursement is received from managed care organizations and government and private insurance, were 90% of pharmacy sales compared to 89% a year ago. Pharmacy sales growth trends are expected to continue primarily because of expansion into new markets, increased penetration in existing markets, availability of new drugs, and demographic changes such as the aging population.

Gross margins were 26.2% of sales in the quarter and 26.4% for the nine-month period compared to 26.2% and 26.8% for the comparable periods last year. The nine-month decrease in gross margin was caused by a number of factors. Non pharmacy margins declined as a result of more aggressive advertising and in-store promotions. Although prescription margins increased, due in part to the shift to more generic medications, the trend continued in sales mix toward pharmacy, which carries lower margins than the rest of the store. Within the pharmacy, third party sales, which typically have lower profit margins than cash prescriptions, continue to become a larger portion of prescription sales.

The company uses the LIFO method of inventory valuation, which can only be determined annually when inflation rates and inventory levels are finalized; therefore, LIFO inventory costs for interim financial statements are estimated. Cost of sales includes a LIFO provision of $22.6 million ($.01 per share) and $65.8 million ($.04 per share) for the quarter and nine-month periods ended May 31, 2002 versus $16.8 million ($.01 per share) and $60.0 million ($.04 per share) for the same periods a year ago. The current estimate of annual inflation rate is 2.25%. Last year during the quarter, the company lowered its estimated annual rate to 2.50% from 2.75% primarily due to lower than projected pharmacy inflation.

Selling, occupancy and administration expenses decreased to 20.6% from 20.7% of sales in the quarter and to 20.7% from 21.0% of sales for the nine months. The decreases were principally caused by lower store salaries and other direct store expenses, which continue to decline on a percent to sales basis as they are spread over a larger base. Partially offsetting the decrease in the quarter were higher insurance and advertising costs.

The effective tax rate was 37.75% for the quarter and nine-month period this fiscal year compared to 38.25% for the comparable periods last year. These decreases were principally the result of lower state income taxes and the settlement of various IRS matters.

CRITICAL ACCOUNTING POLICIES

The financial statements are prepared in accordance with generally accepted accounting principles and include amounts based on management's prudent judgments and estimates. Actual results may differ from these estimates.

Management believes that any reasonable deviation from those judgements and estimates would not have a material impact on the company's consolidated financial position or results of operations. Some of the more significant estimates include liability for closed locations, liability insurance reserves, allowance for doubtful accounts, and cost of sales. The company uses the following techniques to determine estimates:

Liability for closed locations -
	the present value of future rent obligations and other related costs to
	the first lease option date or estimated sublease date

Liability insurance reserves -
	incurred losses by policy year extended by historical growth factors to
	derive ultimate losses

Allowance for doubtful accounts -
	based on both specific receivables and historic write-off percents

Cost of Sales -
	based primarily on point-of-sale scanning information and adjusted based on
	periodic inventories taken throughout the year

FINANCIAL CONDITION

Cash and cash equivalents were $286.2 million at May 31, 2002, compared to $98.7 million at May 31, 2001. Short-term investment objectives are to maximize yields, while minimizing risk and maintaining liquidity. To attain these objectives, investment limits are placed on the amount, type and issuer of securities.

Net cash provided by operating activities for the first nine months of fiscal 2002 was $1,181.5 million compared to $552.8 million a year ago. The change between periods is principally due to tighter control over inventory levels. The company's profitability is the principal source for providing funds for expansion and remodeling programs, dividends to shareholders and funding for various technological improvements.

Net cash used for investing activities was $464.4 million versus $813.5 million last year. Additions to property and equipment were $691.8 million compared to $905.9 million last year. There were 319 new or relocated drugstores opened during the first nine months of this year compared to 343 in the same period last year. New stores are owned or leased. There were 134 owned locations opened during the first nine months of this year or under construction at May 31, 2002 versus 220 for the same period last year.

During the nine-month period the company entered into a sale-leaseback transaction. This transaction involved 42 drugstore locations and resulted in proceeds of $143 million.

Capital expenditures for fiscal 2002 are expected to reach approximately $1 billion. The company expects to open approximately 475 new stores in fiscal 2002 and have more than 6,000 drugstores by the year 2010. The company is continuing to relocate stores to more convenient and profitable freestanding locations. In addition to new stores, a significant portion of the expenditures will be made for technology and distribution centers. During the nine-month period a new distribution center opened in West Palm Beach, Florida. Two new distribution centers are under construction in Ohio and the Dallas metropolitan area. Another is planned in southern California.

Net cash used for financing activities was $447.8 million compared to $346.6 million provided a year ago. The change was principally due to payments of short term borrowings during this year versus proceeds from borrowings during the same period last year. There were no short-term borrowings at May 31, 2002 compared to $357.8 million at May 31, 2001. Borrowings were needed during each year to support working capital needs and store and distribution center growth, which included purchases of new store property, equipment and inventory. The company has a syndicated bank line of credit facility of $600 million to support the company's short-term commercial paper program and has the option to increase the facility to $800 million if required. On July 2, 2002, the company deregistered the remaining $100 million of unissued authorized debt securities, previously filed with the Securities and Exchange Commission.

During the first quarter the company adopted Financial Accounting Standards Board Statement No. 142, "Goodwill and other Intangible Assets." Under this pronouncement, goodwill is no longer amortized but periodically tested for impairment. No significant impact to the consolidated financial position or results of operations occurred as a result of adopting this standard. Also issued during the first quarter was SFAS NO. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This pronouncement, which is effective by the company's fiscal year 2003, may require additional disclosures. However, adoption of this pronouncement is not expected to have a material impact on the company's consolidated financial position or results of operations.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain information in this Form 10-Q, as well as in other public filings, press releases and oral statements made by our representatives, is forward-looking information based on current expectations and plans that involve risks and uncertainties. Forward-looking information includes statements concerning pharmacy sales trends, prescription margins, number and location of new store openings, the level of capital expenditures, demographic trends; as well as those that include or are preceded by the words "expects,""estimates,""believes" or similar language. For such statements, we claim the protection of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

The following factors, in addition to those discussed elsewhere in this Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended August 31, 2001, could cause results to differ materially from management expectations as projected in such forward-looking statements: the impact of events related to the September 11 terrorist attacks, changes in economic conditions generally or in the markets served by the company; consumer preferences and spending patterns; competition from other drugstore chains, supermarkets, on-line retailers, other retailers and mail order companies; changes in state or federal legislation or regulations; the efforts of third party payers to reduce prescription drug costs; the success of planned advertising and merchandising strategies; the availability and cost of real estate and construction; accounting policies and practices; the company's ability to hire and retain pharmacists and other store and management personnel; the company's relationships with its suppliers; the company's ability to successfully implement new computer systems and technology; and adverse determinations with respect to litigation or other claims. Unless otherwise required by applicable securities laws, the company assumes no obligation to update its forward-looking statements to reflect subsequent events or circumstances.

PART 11. OTHER INFORMATION

Item 6. Reports on Form 8-K


	On April 12, 2002, a report on Form 8-K was filed, reporting under "Item 4. Changes in Registrant's Certifying Accountant" that the Registrant dismissed Arthur Andersen LLP as the company's auditors. On May 13, 2002, a report was filed, reporting under "Item 4. Changes in Registrant's Certifying Accountant" that the Registrant named Deloitte & Touche LLP as the company's independent public auditor for the fiscal year ending August 31, 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	WALGREEN CO.
	(Registrant)

Dated July 9, 2002	/s/R.L. Polark
	R.L. Polark
	Senior Vice President
	(Chief Financial Officer)

Dated July 9, 2002	/s/W.M. Rudolphsen
	W.M. Rudolphsen
	Controller
	(Chief Accounting Officer)