Essay about Financial Analysis of Walgreens vs. Cvs

Words: 7290
Pages: 30

Executive Summary

The initial intent of this analysis was to identify changes in accounting methods within the financial statements of Walgreens and CVS, as well as to compare and contrast their financial statements, in order to draw conclusions about which company had 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
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Because CVS uses the first-in, first-out (FIFO) method of accounting for inventory valuation, as opposed to Walgreens' use of the last-in, first-out (LIFO) method, during times of rising inventory costs, CVS utilizes a lower cost of goods sold, leading to higher margins. This is indicative of CVS' liberal accounting procedures and Walgreens' conservatism.

For both retailers, as pharmacy sales continue to grow at a faster rate than storefront sales, total gross margins are negatively effected because pharmacy sales have lower gross margins than storefront sales. Sales mix is a distinguishing factor between these two companies that sell similar products. For example, of Walgreens total sales, pharmacy average 63%, indicating that the remainder of the sales was from storefront items, which carry higher gross margins than pharmacy sales. On the other hand, CVS' pharmacy sales were averaging 70% of total sales, creating lower overall gross margins than Walgreens. To compound the issue of lower margin pharmacy sales, third-party insurance company reimbursed pharmacy sales are lower margin than non-third-party pharmacy sales. Furthermore, the percentage of total pharmacy sales that are covered under third-party insurance programs continues to increase as a percentage of sales. CVS' portion of pharmacy sales that were reimbursed by third party insurance programs was 93.2% during