WALGREEN CO - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

Edgar Glimpses |

The following discussion and analysis of our financial condition and results of operations should be read together with the financial statements and the related notes included elsewhere herein and our consolidated financial statements, accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended August 31, 2013. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under "Cautionary Note Regarding Forward-Looking Statements" below and in Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended August 31, 2013 and our Quarterly Report on Form 10-Q for the quarter ended May 31, 2014. INTRODUCTION Walgreens is principally a retail drugstore chain that sells prescription and non-prescription drugs and general merchandise. General merchandise includes, among other things, household items, convenience and fresh foods, personal care, beauty care, photofinishing and candy. We offer customers the choice to have prescriptions filled at our retail pharmacies as well as through the mail, telephone or online including through our mobile application. At May 31, 2014, we operated 8,683 locations in 50 states, the District of Columbia, Puerto Rico, Guam, and the U.S. Virgin Islands. Total locations do not include 404 Healthcare Clinics that are operated primarily within other Walgreens locations or locations of unconsolidated partially owned entities such as Alliance Boots GmbH (Alliance Boots). Number of Locations Location Type May 31, 2014 May 31, 2013 Drugstores 8,217 8,097

Worksite Health and Wellness Centers 362

369

Infusion and Respiratory Services Facilities 91

81 Specialty Pharmacies 11 11 Mail Service Facilities 2 2 Total 8,683 8,560

The drugstore industry is highly competitive where we compete with other drugstore chains, independent drugstores and mail order prescription providers. We also compete with various other retailers including grocery stores, convenience stores, mass merchants, online pharmacies, warehouse clubs and dollar stores.

Our sales, gross profit margin and gross profit dollars are impacted by, among other things, both the percentage of prescriptions that we fill that are generic and the rate at which new generic drugs are introduced to the market. In general, generic versions of drugs generate lower total sales dollars per prescription, but higher gross profit margins and gross profit dollars, as compared with patent-protected brand name drugs. The positive impact on gross profit margins and gross profit dollars typically has been significant in the first several months after a generic version of a drug is first allowed to compete with the branded version, which is generally referred to as a "generic conversion." In any given year, the number of major brand name drugs that undergo a conversion from branded to generic status can increase or decrease, which can have a significant impact on our sales, gross profit margins and gross profit dollars. Because any number of factors outside of our control or ability to foresee can affect timing for a generic conversion, we face substantial uncertainty in predicting when such conversions will occur and what effect they will have on particular future periods. The long-term outlook for prescription utilization is strong due in part to the aging population, the increasing utilization of generic drugs, the continued development of innovative drugs that improve quality of life and control health care costs, and the expansion of health care insurance coverage under the Patient Protection and Affordable Care Act (the ACA). The ACA seeks to reduce federal spending by altering the Medicaid reimbursement formula (AMP) for multi-source drugs, and when implemented, is expected to reduce Medicaid reimbursements. State Medicaid programs are also expected to continue to seek reductions in reimbursements independent of AMP. We continuously face reimbursement pressure from pharmacy benefit management (PBM) companies, health maintenance organizations, managed care organizations and other commercial third party payers; our agreements with these payers are regularly subject to expiration, termination or renegotiation. In addition, plan changes typically occur in January and in fiscal 2013, the high rate of introduction of new generic drugs moderated the impact of any associated rate adjustments. We experienced lower reimbursements and a significantly lower rate of new generic introductions in the first nine months of fiscal 2014, as compared to the same period last year. We anticipate the effect of new generics to become positive on a year over year basis in the fourth quarter of the current fiscal year. On July 19, 2012, Walgreens and Express Scripts announced their entry into a new multi-year agreement pursuant to which Walgreens began participating in the broadest Express Scripts retail pharmacy provider network available to Express Scripts clients as of September 15, 2012. From January 1, 2012, until September 14, 2012, however, Express Scripts' network did not include Walgreens pharmacies. The positive impact of this agreement generally has been incremental over time since September 15, 2012. Periodically, we make strategic acquisitions and investments that fit our long-term growth objectives. Consideration is given to retail, health and well-being enterprises and other potential acquisitions and investments that provide unique opportunities and fit our business objectives. In the first quarter of fiscal 2014, we acquired certain assets of Kerr Drug and its affiliates, which include 76 retail drugstore locations, as well as a specialty pharmacy business and a distribution center, all based in North Carolina. In fiscal 2013, we acquired Stephen L. LaFrance Holdings, Inc. (USA Drug), which included 141 drugstore locations operating under the USA Drug, Super D Drug, May's Drug, Med-X and Drug Warehouse names. Additionally, we acquired an 80\% interest in Cystic Fibrosis Foundation Pharmacy LLC. This investment provides joint ownership in a specialty pharmacy for cystic fibrosis patients and their families in addition to providing new product launch support and call center services for drug manufacturers. In August 2012, we acquired a 45\% equity interest in Alliance Boots GmbH and a call option that provides Walgreens the right, but not the obligation, to purchase the remaining 55\% over a six month period beginning February 2, 2015. Additional information regarding our investment in Alliance Boots is available in our Current Reports on Form 8-K filed on June 19, 2012 and August 6, 2012 (as amended by the Form 8-K/A filed on September 10, 2012). The amendment to our August 6, 2012 Form 8-K filed on September 10, 2012, includes as exhibits thereto Alliance Boots audited consolidated financial statements for the years ended March 31, 2012, 2011 and 2010 (prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board) and unaudited pro forma consolidated financial information related to our 45\% investment in Alliance Boots. Alliance Boots audited consolidated financial statements for the years ended March 31, 2014 and 2013 (prepared in accordance with IFRS as issued by the IASB) are available on our Form 8-K filed on May 15, 2014. We account for our 45\% investment in Alliance Boots using the equity method of accounting. Investments accounted for under the equity method are recorded initially at cost and subsequently adjusted for our share of the net income or loss and cash contributions and distributions to or from these entities. The investment is recorded as equity investment in Alliance Boots in the Consolidated Condensed Balance Sheets. Our investment in Alliance Boots and the related call option were recorded as assets with an $8.0 billion aggregate value on our May 31, 2014 Consolidated Condensed Balance Sheet, which represented 31.3\% of our long-lived assets as of that date. Because our investment in Alliance Boots is denominated in a foreign currency (British pounds Sterling), translation gains or losses impact the value of the investment. We utilize a three-month lag in reporting equity income from our investment in Alliance Boots, reported as equity earnings in Alliance Boots on the Consolidated Condensed Statements of Earnings. Net income reported by Alliance Boots is translated from British pounds Sterling at the average rate for the period.

See

Note 5 to our unaudited Consolidated Condensed Financial Statements for additional information regarding our equity method investments.

Fiscal 2014 combined synergies across both companies are estimated to be between $400 million and $450 million. The three-month lag impacts the quarterly and fiscal year timing of when Alliance Boots results and synergies are reflected in the equity earnings in Alliance Boots included in our financial statements.

See

"Cautionary Note Regarding Forward-Looking Statements" below.

The Alliance Boots business is seasonal in nature, typically generating a higher proportion of revenue and earnings in the winter holiday and cold and flu season. Because we utilize a three-month lag in reporting equity income from our investment in Alliance Boots, the results of Alliance Boots for December, January and February are reflected in the equity income included in our financial statements for the fiscal quarter ending May 31. See "Cautionary Note Regarding Forward-Looking Statements" below. The Company continues to evaluate the potential exercise of the option to acquire the 55\% equity interest in Alliance Boots it does not currently own, including the potential timing and structure, the combined management team, additional synergy and cost reduction initiatives and potential changes to the Company's capital structure. This evaluation is ongoing and further information in this regard is expected to be announced in the fourth quarter of fiscal 2014. See "Cautionary Note Regarding Forward-Looking Statements" below. On March 19, 2013, the Company, Alliance Boots GmbH and AmerisourceBergen Corporation (AmerisourceBergen) announced various agreements and arrangements, including a ten-year pharmaceutical distribution agreement between Walgreens and AmerisourceBergen pursuant to which we will source branded and generic pharmaceutical products from AmerisourceBergen; an agreement which provides AmerisourceBergen the ability to access generics and related pharmaceutical products through Walgreens Boots Alliance Development GmbH, a global sourcing joint venture between Walgreens and Alliance Boots; and agreements and arrangements pursuant to which we and Alliance Boots together have the right, but not the obligation, to purchase a minority equity position in AmerisourceBergen and gain associated representation on AmerisourceBergen's board of directors in certain circumstances. AmerisourceBergen began to distribute all branded pharmaceutical products that we historically sourced from distributors and suppliers, effective September 1, 2013. In the second quarter of fiscal year 2014, AmerisourceBergen began distributing generic pharmaceutical products that we previously self-distributed. We expect the levels of generic pharmaceuticals distributed by AmerisourceBergen to continue to increase throughout the fiscal year. In addition to the information in this report, please refer to our Current Report on Form 8-K filed on March 20, 2013, our Quarterly Report on Form 10-Q filed on March 25, 2013 and our Schedule 13D filed on April 15, 2014 for more detailed information regarding these agreements and arrangements. See "Cautionary Note Regarding Forward-Looking Statements" below.

STORE CLOSURES

On March 24, 2014, our Board of Directors approved a plan to close underperforming stores in efforts to optimize and focus resources in a manner intended to increase shareholder value. We estimate that total pre-tax charges associated with the plan will be between $240 million and $280 million, largely attributable to lease termination costs. This store optimization plan is expected to result in an annual operating income benefit of $40 million to $50 million beginning in fiscal 2015. The amounts and timing of all estimates are subject to change. The actual amounts and timing may vary materially based on various factors, including the timing and number of store closings; the timing and amount of sublease income and other lease expense; factors relating to real estate including sale proceeds; asset write-downs and other factors affecting inventory value; changes in management's assumptions; and other factors. See "Cautionary Note Regarding Forward-Looking Statements" below. We closed 25 stores and incurred pre-tax charges of $95 million ($47 million related to lease termination costs and $48 million in asset impairments) during the quarter ended May 31, 2014. We expect that substantially all of the remaining charges will be recognized during the fourth quarter of fiscal 2014. OPERATING STATISTICS Percentage Increases/(Decreases) Three Months Ended Nine Months Ended May 31, May 31, May 31, May 31, 2014 2013 2014 2013 Net Sales 5.9 3.2 5.6 (0.5 ) Net Earnings Attributable to Walgreen Co. 15.7 16.2 21.1 1.1 Comparable Drugstore Sales 4.8 1.4 4.8 (3.1 ) Prescription Sales 8.4 3.4 7.6 (1.4 ) Comparable Drugstore Prescription Sales 6.3 2.0 6.4 (4.2 ) Front-End Sales 2.3 2.7 2.5 0.9 Comparable Drugstore Front-End Sales 2.2 0.4 2.2 (1.5 ) Gross Profit 4.2 4.1 2.0 2.7 Selling, General and Administrative Expenses 4.3 5.3 1.8 5.0 Percent to Net Sales Three Months Ended Nine Months Ended May 31, May 31, May 31, May 31, 2014 2013 2014 2013 Gross Margin 28.1 28.5 28.3 29.4 Selling, General and Administrative Expenses 23.5 23.8 23.5 24.3 Other Statistics Three Months Ended Nine Months Ended May 31, May 31, May 31, May 31, 2014 2013 2014 2013

Prescription Sales as a \% of Net Sales 64.4 63.1 63.7 62.6 Third Party Sales as a \% of Total Prescription Sales 96.6 96.1 96.3 95.7 Number of Prescriptions (in millions) 178 173 528 516 Comparable Prescription \% Increase/(Decrease) 2.1 5.2 1.6 (0.1 ) 30 Day Equivalent Prescriptions (in millions) * 218 209 645 618 Comparable 30 Day Equivalent Prescription \% Increase * 4.1 7.1 3.9 2.0 Total Number of Locations 8,683 8,560

* Includes the adjustment to convert prescriptions greater than 84 days to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription.

RESULTS OF OPERATIONS

Net earnings attributable to Walgreen Co. for the third quarter ended May 31, 2014, were $722 million, or $0.75 per diluted share. This was a 15.7\% increase in net earnings over the same quarter last year. The net earnings increase in the quarter was primarily attributable to higher net sales, a lower effective income tax rate, lower selling, general and administrative expenses as a percentage of sales and gains on fair market value adjustments related to the AmerisourceBergen warrants partially offset by lower gross margins. Included in the third quarter net earnings and net earnings per diluted share, respectively, was $68 million, or $0.07 per diluted share, of store closure and other optimization costs; income of $67 million, or $0.07 per diluted share, related to combined fair value adjustments and amortization related to both our and Alliance Boots warrants to purchase AmerisourceBergen common stock; $63 million, or $0.06 per diluted share, in acquisition-related amortization; $55 million, or $0.06 per diluted share, in Alliance Boots related tax; $28 million, or $0.03 per diluted share, from the quarter's LIFO provision; and $14 million, or $0.01 per diluted share, of other acquisition-related costs. Included in the third quarter ended May 31, 2013 net earnings and net earnings per diluted share, respectively, were the negative impacts of $76 million, or $0.08 per diluted share, from the quarter's LIFO provision; $52 million, or $0.05 per diluted share, in acquisition-related amortization; $47 million, or $0.05 per diluted share, related to a legal settlement with the Drug Enforcement Administration (DEA); $44 million, or $0.05 per diluted share, in Alliance Boots related tax; and $17 million, or $0.02 per diluted share, of acquisition-related costs. Net earnings in the quarter ended May 31, 2013 were positively impacted by $48 million, or $0.05 per diluted share, from combined fair value adjustments and amortization related to both our and Alliance Boots warrants to purchase AmerisourceBergen common stock. For the nine month period ended May 31, 2014, net earnings increased 21.1\% to $2,171 million or $2.25 per diluted share. The net earnings increase for the nine month period was primarily attributable to higher net sales, lower selling, general and administrative expenses as a percentage of sales, higher equity earnings in Alliance Boots, fair market value gains related to the AmerisourceBergen warrants and a lower effective tax rate partially offset by lower gross margins. Included in the nine month period net earnings and net earnings per diluted share, respectively, was $254 million of income, or $0.26 per diluted share, related to combined fair value adjustments and amortization related to both our and Alliance Boots warrants to purchase AmerisourceBergen common stock; $181 million, or $0.19 per diluted share, in acquisition-related amortization; $130 million, or $0.13 per diluted share, in Alliance Boots related tax; $98 million, or $0.10 per diluted share, from the nine months' LIFO provision; $84 million, or $0.09 per diluted share, of store closure and other optimization costs; and $41 million, or $0.04 per diluted share, of acquisition-related costs. Included in the nine month period ending May 31, 2013, net earnings and net earnings per diluted share, respectively, were the negative impacts of $182 million, or $0.19 per diluted share, in acquisition-related amortization; $156 million, or $0.16 per diluted share, from the LIFO provision; $86 million, or $0.09 per diluted share, in Alliance Boots related tax; $53 million, or $0.05 per diluted share, of acquisition related costs; $47 million, or $0.06 per diluted share, relating to certain litigation matters including the DEA settlement; and $24 million, or $0.03 per diluted share, in costs related to Hurricane Sandy. Net earnings in the nine month period were positively impacted by $48 million, or $0.05 per diluted share, from combined fair value adjustments and amortization related to both our and Alliance Boots warrants to purchase AmerisourceBergen common stock and $13 million, or $0.01 per diluted share, from an additional gain on the 2011 sale of the Walgreens Health Initiatives, Inc. business relating to a client retention escrow. Net sales for the quarter ended May 31, 2014, increased by 5.9\% to $19.4 billion. Sales increased from higher comparable store sales and new stores, each of which includes an indeterminate amount of market-driven price changes. Sales in comparable drugstores were up 4.8\% in the quarter ended May 31, 2014. Comparable drugstores are defined as those that have been open for at least twelve consecutive months without closure for seven or more consecutive days and without a major remodel or a natural disaster in the past twelve months. Relocated and acquired stores are not included as comparable stores for the first twelve months after the relocation or acquisition. We operated 8,683 locations (8,217 drugstores) as of May 31, 2014, compared to 8,560 locations (8,097 drugstores) a year earlier. Prescription sales increased by 8.4\% in the current quarter and 7.6\% for the first nine months, representing 64.4\% and 63.7\% of total net sales, respectively. In the prior year, prescription sales increased 3.4\% in the quarter and decreased 1.4\% year to date, representing 63.1\% and 62.6\% of total net sales, respectively. Comparable drugstore prescription sales were up 6.3\% in the current quarter and 6.4\% for the nine month period. The effect of generic drugs, which have a lower retail price, replacing brand name drugs reduced prescription sales by 1.4\% in the current quarter and 1.2\% for the first nine months versus reductions of 4.2\% and 6.3\% in the same periods last year. The effect of generics on total net sales was a reduction of 0.8\% in the current quarter and 0.7\% year to date compared to reductions of 2.4\% for the quarter and 3.5\% for the first nine months last year. Third party sales, where reimbursement is received from managed care organizations, the government, employers or private insurers, were 96.6\% of prescription sales for the quarter and 96.3\% for the nine month periods ended May 31, 2014 compared to 96.1\% for the quarter and 95.7\% for the nine month period last year. We receive market driven reimbursements from third party payers based on negotiated and contracted reimbursement rates, a number of which typically reset in January. The total number of prescriptions filled for the current quarter (including immunizations) was approximately 178 million compared to 173 million for the same period last year. Prescriptions adjusted to 30 day equivalents were 218 million in the current quarter versus 209 million in last year's quarter. Front-end sales increased 2.3\% for the current quarter and were 35.6\% of total net sales. For the nine months ended May 31, 2014, front-end sales increased 2.5\% and comprised 36.3\% of total net sales. In comparison, prior year front end sales increased 2.7\% for the quarter and increased 0.9\% for the nine month period, and comprised 36.9\% and 37.4\% of total net sales. Comparable drugstore front-end sales increased 2.2\% for the current quarter and 2.2\% year to date compared to the prior year which increased 0.4\% in the quarter and decreased 1.5\% year to date. The increase in comparable front-end sales in the current quarter was primarily attributed to an increase in basket size partially offset by lower customer traffic. Gross margin as a percent of sales was 28.1\% in the current quarter and 28.3\% for the first nine months compared to 28.5\% and 29.4\% last year. Retail pharmacy margins were negatively impacted in the quarter and year to date periods by lower third-party reimbursement; the increase in Medicare Part D mix including the strategy to continue driving 90-day prescriptions at retail; fewer brand-to-generic drug conversions compared with the prior year period; generic drug price inflation on a subset of generic drugs; and a mix of specialty drugs, which carry a lower margin percentage. Front-end margins were positively impacted in the current quarter primarily from the personal care, household items and convenience and fresh foods categories partially offset by the candy, non-prescription drug and beauty categories. Year to date front-end margins were negatively impacted in the convenience and fresh foods, non-prescription drug, photofinishing and candy categories. Retail pharmacy and front-end margins were positively impacted in the quarter and year to date periods by purchasing synergies realized from the joint venture formed by Walgreens and Alliance Boots. We expect the negative factors impacting pharmacy margin will more than offset the anticipated generic introduction in the fourth quarter on a year over year basis. Gross profit dollars for the quarter and nine month periods ended May 31, 2014 increased $218 million, or 4.2\%, and $314 million, or 2.0\%, respectively, compared to the same periods last year. The increase is attributed to higher sales volumes partially offset by lower retail pharmacy margins. We use 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 the interim financial statements are estimated. Cost of sales included a LIFO provision of $41 million and $150 million for the quarter and nine month periods ended May 31, 2014, respectively, versus $120 million and $247 million in the same periods a year ago. In the current quarter, our estimated annual inflation rate decreased from 2.50\% to 2.25\%, primarily due to lower forecasted prescription drug inventory levels. In the prior year's quarter, the estimated annual inflation rate increased from 2.75\% to 3.50\% primarily due to higher than anticipated prescription drug inflation. Selling, general and administrative expenses as a percentage of sales were 23.5\% for the current year's third quarter and first nine months compared to 23.8\% and 24.3\% in the same periods a year ago. As a percentage of sales, expenses in the current quarter were lower primarily due to lower store compensation costs, store occupancy costs, acquisition related costs and legal expenses, partially offset by store closure costs related to our store optimization plan and higher weather-related costs. Expenses for the nine month period as a percentage of sales were lower primarily due to lower store compensation costs, legal expenses and store occupancy costs, partially offset by higher store closure costs through our store optimization plan. Included in the prior year's nine month period were expenses related to Hurricane Sandy, the DEA settlement, and higher investments in strategic initiatives and capabilities. Selling, general and administrative expense dollars increased $189 million or 4.3\% over the prior year's quarter and $242 million or 1.8\% over the prior year's nine month period. The current quarter's growth includes 2.3\% of store closure and other optimization costs, 1.8\% of headquarters expenses, 1.4\% of new store expenses and 0.1\% of acquisition related amortization which were partially offset by lower legal costs incurred as compared to last year related to the DEA settlement of 0.7\%, lower comparable store expenses of 0.3\% and acquisition related costs of 0.3\%. Growth for the nine month period ended May 31, 2014 included 1.3\% of new store expenses, 0.9\% of store closure and other optimization costs and 0.3\% of comparable store growth. These were partially offset by lower legal costs related to the DEA settlement last year of 0.2\% and lower acquisition related costs of 0.2\%. In addition, Hurricane Sandy costs in the prior year were 0.3\%. Equity earnings in the 45\% Alliance Boots equity method investment for the three month period ended May 31, 2014 were $137 million compared to $131 million last year. The current quarter included $27 million of expense in fair value adjustments and amortization related to Alliance Boots warrants to purchase AmerisourceBergen common stock. Earnings also reflect $11 million ($8 million net of tax) of incremental acquisition-related amortization in the current quarter compared to amortization of $7 million ($3 million net of tax) in the prior year's quarter. Equity earnings in the 45\% Alliance Boots equity method investment for the nine month period ended May 31, 2014 were $482 million as compared to $220 million last year. Alliance Boots earnings are reported on a three-month lag. As a result, the nine month period ended May 31, 2013 only included seven months of August through February's results of operations of Alliance Boots reflected in the equity earnings in Alliance Boots due to the timing of this investment. Earnings in the first nine months of the current year included $91 million in fair value adjustments and amortization related to Alliance Boots warrants to purchase AmerisourceBergen common stock and $71 million from remeasuring deferred tax balances related to UK tax law changes enacted in July 2013. Earnings also reflect $31 million ($24 million net of tax) of incremental acquisition-related amortization in the current nine month period compared to amortization of $47 million ($36 million net of tax) in the prior year period, $23 million ($18 million net of tax) of which was related to inventory. Other income for the three and nine month periods ended May 31, 2014 was $124 million and $290 million, respectively. The change in fair value of our AmerisourceBergen warrants resulted in recording other income of $119 million and $275 million for the three and nine month periods, respectively, primarily attributable to the change in the price of AmerisourceBergen's common stock. In addition, we recorded $5 million and $15 million in the quarter and nine month periods, respectively, of other income relating to the amortization of the deferred credit associated with the initial value of the warrants. Interest was a net expense of $35 million in the quarter and $113 million year to date compared to $50 million and $110 million for the prior quarter and year to date, respectively. The current and prior year's interest expense is net of $1 million in the quarter and $4 million year to date, which was capitalized to construction projects. Interest expense in the prior year's nine month period was reduced by a $19 million receipt of interest income related to late payments of state Medicaid receivables. The effective tax rate for the quarter was 31.5\% compared to 38.7\% in the prior year. The decrease in the current quarter's tax rate as compared to the same quarter of the prior year is primarily attributable to additional foreign source income taxed at lower rates, a net benefit for changes in uncertain tax positions, higher non-deductible expenses that occurred in the prior year and other discrete items. For the fourth quarter, we estimate our effective tax rate to be approximately 36\%. The effective tax rate for the nine month period decreased from 37.7\% last year to 34.3\% in the current year primarily attributable to additional foreign source income taxed at lower rates, higher non-deductible expenses incurred in the prior year and other discrete items.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $2.1 billion at May 31, 2014, compared to $3.0 billion at May 31, 2013. Short-term investment objectives are to minimize risk, maintain liquidity and maximize after-tax yields. To attain these objectives, investment limits are placed on the amount, type and issuer of securities. Investments are principally in U.S. Treasury market funds. Our long-term capital policy is to maintain a strong balance sheet and financial flexibility; reinvest in our core strategies; invest in strategic opportunities that reinforce our core strategies and meet return requirements; and return surplus cash flow to shareholders in the form of dividends and share repurchases over the long term. The Company continues to evaluate the potential exercise of the option to acquire the 55\% equity interest in Alliance Boots it does not currently own, including the potential timing and structure, the combined management team, additional synergy and cost reduction initiatives and potential changes to the Company's capital structure. This evaluation is ongoing and further information in this regard is expected to be announced in the fourth quarter of fiscal 2014. See "Cautionary Note Regarding Forward-Looking Statements" below. Net cash provided by operating activities for the nine months ended May 31, 2014, was $2.5 billion compared to $3.2 billion a year ago. When compared to the prior year, cash from operating activities decreased primarily as a result of changes in working capital balances. For the nine months ended May 31, 2014, working capital used $480 million of cash as compared to the prior year, where working capital was a cash inflow of $491 million. The decrease in cash used for working capital was primarily attributable to timing of payments related to the AmerisourceBergen distribution transition and increased receivables, partially offset by lower inventory levels. Cash provided by operations is the principal source of funds for expansion, acquisitions, remodeling programs, dividends to shareholders and stock repurchases. Net cash used for investing activities was $1.5 billion for the nine months ended May 31, 2014 and 2013. Additions to property and equipment were $821 million compared to $874 million last year. During the first nine months, we added a total of 216 locations (101 net) compared to 312 last year (175 net). There were 23 owned locations added during the first nine months and 17 under construction at May 31, 2014 versus 32 owned locations added and 40 under construction last year. Infusion and Respiratory Specialty Drugstores Worksites Services Pharmacies Mail Service Total August 31, 2013 8,116 371 82 11 2 8,582 New/Relocated 107 23 1 1 - 132 Acquired 70 - 14 - - 84 Closed/Replaced (76 ) (32 ) (6 ) (1 ) - (115 ) May 31, 2014 8,217 362 91 11 2 8,683 Business acquisitions this year were $323 million versus $588 million in the prior year. Business acquisitions in the current year include the purchase of certain assets of regional drugstore chain Kerr Drug and its affiliates for $173 million, subject to adjustment in certain circumstances. Business acquisitions in the comparable prior year period included the purchase of the regional drugstore chain USA Drug from Stephen L. LaFrance Holdings, Inc. and members of the LaFrance family for $429 million net of assumed cash, an 80\% interest in Cystic Fibrosis Foundation Pharmacy, LLC for $29 million net of assumed cash, and selected other assets (primarily prescription files). Last year we received client retention proceeds of $20 million related to the sale of Walgreens Health Initiatives, Inc in fiscal 2011. In connection with our strategic relationship with AmerisourceBergen, we purchased AmerisourceBergen common stock in open market transactions totaling $493 million during the nine month period ended May 31, 2014. Capital expenditures for fiscal 2014 are expected to be approximately $1.3 billion, excluding business acquisitions, joint ventures and prescription file purchases, although the actual amount may vary depending upon a variety of factors, including, among other things, the timing of implementation of certain capital projects. In addition, we continue to optimize and focus our resources in a manner to increase shareholder value. As of May 31, 2014, we have closed 25 of the 76 retail locations previously announced to be closed. In the fourth quarter of fiscal 2014, we expect to incur charges between $145 million and $185 million in costs related to the closure of the remaining 51 retail store locations, most of which relates to lease termination charges. Including these store closures, we expect our net drugstore locations to increase by approximately 55 to 75 locations in fiscal 2014. Net cash used by financing activities was $944 million compared to the prior year net cash provided by financing activities of $24 million. In the current fiscal year, we paid in full our $550 million unsecured notes that matured in March 2014. We repurchased shares to support the needs of the employee stock plans totaling $205 million this year compared to $567 million last year. Proceeds related to employee stock plans were $518 million during the first nine months versus $391 million for the same period last year. Cash dividends paid were $898 million during the first nine months of fiscal 2014, versus $780 million for the same period a year ago. Last year we received proceeds from a public offering of $4.0 billion of notes with varying interest rates (see Note 8). The notes were used, in part, to repay the $3.0 billion 364-day bridge term loaned obtained in connection with the investment in Alliance Boots. In connection with our capital policy, our Board of Directors has authorized share repurchase programs and set a long-term dividend payout ratio target between 30 and 35 percent of net earnings attributable to Walgreen Co. Our Board of Directors authorized the 2012 stock repurchase program, which allows for the repurchase of up to $2.0 billion of the Company's common stock prior to its expiration on December 31, 2015. We did not purchase any shares under the program in the first nine months of fiscal 2014 or 2013. We determine the timing and amount of repurchases based on our assessment of various factors including prevailing market conditions, alternate uses of capital, liquidity, the economic environment and other factors. The timing and amount of these purchases may change at any time and from time to time. The Company has repurchased and may from time to time in the future repurchase shares on the open market through Rule 10b5-1 plans, which enable a company to repurchase shares at times when it otherwise might be precluded from doing so under insider trading laws. We have periodically borrowed under our commercial paper program during the first nine months of the current fiscal year, and may continue to borrow in future periods. We had average daily short-term borrowings of $5 million of commercial paper outstanding at a weighted average interest rate of 0.23\% for the nine months ended May 31, 2014. There were no borrowings outstanding under the program at May 31, 2014. In connection with our commercial paper program, we maintain two unsecured backup syndicated lines of credit that total $1.35 billion. The first $500 million facility expires on July 20, 2015, and allows for the issuance of up to $250 million in letters of credit. The second $850 million facility expires on July 23, 2017, and allows for the issuance of up to $200 million in letters of credit. The issuance of letters of credit under either of these facilities reduces available borrowings. Our ability to access these facilities is subject to our compliance with the terms and conditions of the credit facility, including financial covenants. The covenants require us to maintain certain financial ratios related to the proportion of consolidated debt to total capitalization and priority debt, along with limitations on the sale of assets and purchases of investments. At May 31, 2014, we were in compliance with all such covenants. The Company pays a facility fee to the financing banks to keep these lines of credit active. At May 31, 2014, there were no letters of credit issued against these facilities.

As of July 1, 2014, our credit ratings were:

Rating Agency Long-Term Debt Rating Commercial Paper Rating Outlook Moody's Baa1 P-2 Stable Standard & Poor's BBB A-2 Stable In assessing our credit strength, both Moody's and Standard & Poor's consider our business model, capital structure, financial policies and financial performance as well as the financial performance and level of outstanding debt of Alliance Boots. Our credit ratings impact our borrowing costs, access to capital markets and operating lease costs. The rating agency ratings are not recommendations to buy, sell or hold our debt securities or commercial paper. Each rating may be subject to revision or withdrawal at any time by the assigning rating organization and should be evaluated independently of any other rating. Pursuant to our Purchase and Option Agreement with Alliance Boots, we have the right, but not the obligation, to purchase the remaining 55\% interest in Alliance Boots during the period beginning February 2, 2015 and ending August 2, 2015. If we exercise this call option, we would, subject to the terms and conditions of such agreement, be obligated to make a cash payment of £3.133 billion (equivalent to approximately $5.2 billion based on exchange rates as of May 31, 2014) and issue approximately 144.3 million shares of our common stock, with the amount and form of such consideration being subject to adjustment in certain circumstances including if the volume weighted average price of our common stock is below $31.18 per share during a period shortly before the closing of the second step transaction. We also would assume the then-outstanding debt of Alliance Boots upon the closing of the second step transaction. Pursuant to our arrangements with AmerisourceBergen and Alliance Boots, we and Alliance Boots have the right, but not the obligation, to purchase a minority equity position in AmerisourceBergen over time pursuant to open market purchases and warrants to acquire AmerisourceBergen common stock. WAB Holdings, LLC, a newly-formed entity jointly owned by Walgreens and Alliance Boots, which is consolidated by Walgreens, can acquire up to 19,859,795 shares which represents approximately 7\% of the outstanding AmerisourceBergen common stock on a fully-diluted basis, assuming exercise in full of the warrants. The amount of permitted open market purchases is subject to increase in certain circumstances. We have purchased a total of approximately 11.5 million AmerisourceBergen shares in the open market, including 7.5 million shares with a cost basis of $493 million in the nine month period ended May 31, 2014. We have funded these purchases over time through cash contributions to WAB Holdings. Share purchases may be made from time to time in open market transactions or pursuant to instruments and plans complying with Rule 10b5-1. If we elect to exercise the two warrants issued by AmerisourceBergen in full, Walgreens would, subject to the terms and conditions of such warrants, be required to make a cash payment of approximately $584.4 million in connection with the exercise of the first warrant during a six-month period beginning in March 2016 and $595.8 million in connection with the exercise of the second warrant during a six-month period beginning in March 2017. Similarly, if Alliance Boots elects to exercise the two warrants issued by AmerisourceBergen in full, Alliance Boots would, subject to the terms and conditions of such warrants, be required to pay AmerisourceBergen similar amounts upon the exercise of their warrants in 2016 and 2017. If Walgreens elects to exercise its option to purchase the remaining 55\% interest in Alliance Boots, Walgreens would acquire the warrants held by Alliance Boots and be required to make cash payments of approximately $1.2 billion in order to exercise each tranche of warrants. Our and Alliance Boots ability to invest in equity in AmerisourceBergen above certain thresholds is subject to the receipt of regulatory approvals.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any unconsolidated special purpose entities and, except as described herein, we do not have significant exposure to any off - balance sheet arrangements. The term "off - balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have: (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets. Letters of credit are issued to support purchase obligations and commitments (as reflected on the Contractual Obligations and Commitments table) as follows

(in millions): May 31, 2014 Inventory purchase commitments $ 29 Insurance 259 Real estate development 4 Total $ 292 We have no off - balance sheet arrangements other than those disclosed on the Contractual Obligations and Commitments table. Both on - balance sheet and off - balance sheet financing alternatives are considered when pursuing our capital structure and capital allocation objectives.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following table lists our contractual obligations and commitments as of May 31, 2014: Payments Due by Period (In millions) Less than 1 Total Year 1-3 Years 3-5 Years Over 5 Years Operating leases (1) $ 34,589 $ 2,500 $ 4,943 $ 4,635 $ 22,511 Purchase obligations (2) Open inventory purchase orders 1,694 1,694 -

- - Real estate development 200 133 60 7 - Other corporate obligations 670 225 283 145 17 Long-term debt* 4,505 758 7 2,022 1,718 Interest payment on long-term debt 1,282 138 259 235 650 Insurance* 627 182 202 92 151 Retiree health* 348 11 28 34 275

Closed location obligations* 171 38 46 27 60 Capital lease obligations *(1) 499 15 30

28 426 Other long-term liabilities reflected on the balance sheet*(3) 1,198 107 244 170 677 Total $ 45,783 $ 5,801 $ 6,102 $ 7,395 $ 26,485

* Recorded on balance sheet.

(1) Amounts for operating leases and capital leases do not include certain

operating expenses under these leases such as common area maintenance,

insurance and real estate taxes. These expenses for the Company's most

recent fiscal year were $435 million. (2) Purchase obligations include agreements to purchase goods or services that

are enforceable and legally binding and that specify all significant terms,

including open purchase orders. (3) Includes $127 million ($74 million in 1-3 years, $45 million in 3-5 years

and $8 million over 5 years) of unrecognized tax benefits recorded under

Accounting Standards Codification Topic 740, Income Taxes.

The obligations and commitments included in the table above do not include unconsolidated partially owned entities, such as Alliance Boots GmbH, of which we own 45\% of the outstanding share capital. The expected timing of payments of the obligations above is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations. In connection with the Alliance Boots Purchase and Option Agreement dated June 18, 2012, we have the right, but not the obligation, to purchase the remaining 55\% interest in Alliance Boots GmbH at any time during the period beginning February 2, 2015, and ending August 2, 2015. If we exercise this call option, we would, subject to the terms and conditions of such agreement, be obligated to make a cash payment of £3.133 billion (equivalent to approximately $5.2 billion based on exchange rates as of May 31, 2014) and issue approximately 144.3 million shares of our common stock, with the amount and form of such consideration being subject to adjustment in certain circumstances including if the volume weighted average price of our common stock is below $31.18 per share during a period shortly before the closing of the second step transaction. We also would assume the then-outstanding debt of Alliance Boots GmbH upon the closing of the second step transaction. In the event that we do not exercise the option, or we exercise the call option but the second step transaction does not close, under certain circumstances, our ownership of Alliance Boots GmbH will reduce from 45\% to 42\% in exchange for nominal consideration to Walgreens. In addition, pursuant to our arrangements with AmerisourceBergen and Alliance Boots, we and Alliance Boots have the right, but not the obligation, to purchase a minority equity position in AmerisourceBergen over time, including pursuant to open market purchases and warrants to acquire AmerisourceBergen common stock. If we elect to exercise the two warrants issued by AmerisourceBergen in full, Walgreens would, subject to the terms and conditions of such warrants, be required to make a cash payment of approximately $584.4 million in connection with the exercise of the first warrant during a six-month period beginning in March 2016 and $595.8 million in connection with the exercise of the second warrant during a six-month period beginning in March 2017. Similarly, if Alliance Boots elects to exercise the two warrants issued by AmerisourceBergen in full, Alliance Boots would, subject to the terms and conditions of such warrants, be required to pay AmerisourceBergen similar amounts upon the exercise of their warrants in 2016 and 2017. If Walgreens elects to exercise its option to purchase the remaining 55\% interest in Alliance Boots, Walgreens would acquire the warrants held by Alliance Boots and be required to make cash payments of approximately $1.2 billion in order to exercise each tranche of warrants. Our and Alliance Boots ability to invest in equity in AmerisourceBergen above certain thresholds is subject to the receipt of regulatory approvals. See "Liquidity and Capital Resources" above.

CRITICAL ACCOUNTING POLICIES

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America 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 judgments and estimates would not have a material impact on our consolidated financial position or results of operations. To the extent that the estimates used differ from actual results, however, adjustments to the statement of earnings and corresponding balance sheet accounts would be necessary. These adjustments would be made in future statements. For a discussion of the Company's significant accounting policies, please see our Annual Report on Form 10-K for the fiscal year ended August 31, 2013. Some of the more significant estimates include goodwill and other intangible asset impairment, allowance for doubtful accounts, vendor allowances, asset impairments, liability for closed locations, liability for insurance claims, cost of sales and income taxes. We use the following methods to determine our estimates:

Goodwill and other intangible asset impairment -

Goodwill and other indefinite-lived intangible assets are not amortized, but

are evaluated for impairment annually during the fourth quarter, or more

frequently if an event occurs or circumstances change that would more likely

than not reduce the fair value of a reporting unit below its carrying value.

As part of our impairment analysis for each reporting unit, we engage a third

party appraisal firm to assist in the determination of estimated fair value

for each unit. This determination includes estimating the fair value using

both the income and market approaches. The income approach requires

management to estimate a number of factors for each reporting unit, including

projected future operating results, economic projections, anticipated future

cash flows and discount rates. The market approach estimates fair value using

comparable marketplace fair value data from within a comparable industry

grouping.

The determination of the fair value of the reporting units and the allocation

of that value to individual assets and liabilities within those reporting

units requires us to make significant estimates and assumptions. These

estimates and assumptions primarily include, but are not limited to: the

selection of appropriate peer group companies; control premiums appropriate

for acquisitions in the industries in which we compete; the discount rate;

terminal growth rates; and forecasts of revenue, operating income,

depreciation and amortization and capital expenditures. The allocation

requires several analyses to determine fair value of assets and liabilities

including, among other things, purchased prescription files, customer

relationships and trade names. Although we believe our estimates of fair value

are reasonable, actual financial results could differ from those estimates due

to the inherent uncertainty involved in making such estimates. Changes in

assumptions concerning future financial results or other underlying

assumptions could have a significant impact on either the fair value of the

reporting units, the amount of the goodwill impairment charge, or both.

We also compared the sum of the estimated fair values of the reporting units

to the Company's total value as implied by the market value of the Company's

equity and debt securities. This comparison indicated that, in total, our

assumptions and estimates were reasonable. However, future declines in the

overall market value of the Company's equity and debt securities may indicate

that the fair value of one or more reporting units has declined below its

carrying value.

One measure of the sensitivity of the amount of goodwill impairment charges to

key assumptions is the amount by which each reporting unit "passed" (fair

value exceeds the carrying amount) or "failed" (the carrying amount exceeds

fair value) the first step of the goodwill impairment test. Preliminary

goodwill impairment testing at one of the Company's reporting units indicated

that its fair value was within 10\% of carrying value. Goodwill allocated to

this reporting unit was $690 million at May 31, 2014.

We have not made any material changes to the method of evaluating goodwill and

intangible asset impairments during the last three years. Based on current

knowledge, we do not believe there is a reasonable likelihood that there will

be a material change in the estimates or assumptions used to determine

impairment.

Allowance for doubtful accounts -

The provision for bad debt is based on both specific receivables and historic

write-off percentages. We have not made any material changes to the method of

estimating our allowance for doubtful accounts during the last three years.

Based on current knowledge, we do not believe there is a reasonable likelihood

that there will be a material change in the estimates or assumptions used to

determine the allowance.

Vendor allowances -

Vendor allowances are principally received as a result of purchases, sales or

promotion of vendors' products. Allowances are generally recorded as a

reduction of inventory and are recognized as a reduction of cost of sales when

the related merchandise is sold. Those allowances received for promoting

vendors' products are offset against advertising expense and result in a

reduction of selling, general and administrative expenses to the extent of

advertising incurred, with the excess treated as a reduction of inventory

costs. We have not made any material changes to the method of estimating our

vendor allowances during the last three years. Based on current knowledge, we

do not believe there is a reasonable likelihood that there will be a material

change in the estimates or assumptions used to determine vendor allowances.

Asset impairments -

The impairment of long-lived assets is assessed based upon both qualitative

and quantitative factors, including years of operation and expected future

cash flows, and tested for impairment annually or whenever events or

circumstances indicate that a certain asset may be impaired. If the future

cash flows reveal that the carrying value of the asset group may not be

recoverable, an impairment charge is immediately recorded. We have not made

any material changes to the method of estimating our asset impairments during

the last three years. Based on current knowledge, we do not believe there is

a reasonable likelihood that there will be a material change in the estimates

or assumptions used to determine asset impairments.

Liability for closed locations -

The liability is based on the present value of future rent obligations and

other related costs (net of estimated sublease rent) to the first lease option

date. We have not made any material changes to the method of estimating our

liability for closed locations during the last three years. Based on current

knowledge, we do not believe there is a reasonable likelihood that there will

be a material change in the estimates or assumptions used to determine the

liability.

Liability for insurance claims -

The liability for insurance claims is recorded based on estimates for claims

incurred and is not discounted. The provisions are estimated in part by

considering historical claims experience, demographic factors and other

actuarial assumptions. We have not made any material changes to the method of

estimating our liability for insurance claims during the last three years.

Based on current knowledge, we do not believe there is a reasonable likelihood

that there will be a material change in the estimates or assumptions used to

determine the liability.

Cost of sales -

Drugstore cost of sales is derived based on point-of-sale scanning information

with an estimate for shrinkage and adjusted based on periodic inventory

counts. Inventories are valued at the lower of cost or market determined by

the last-in, first-out (LIFO) method. We have not made any material changes

to the method of estimating cost of sales during the last three years. Based

on current knowledge, we do not believe there is a reasonable likelihood that

there will be a material change in the estimates or assumptions used to

determine cost of sales.

Equity method investments -

We use the equity method to account for investments in companies if the

investment provides the ability to exercise significant influence, but not

control, over operating and financial policies of the investee. Our

proportionate share of the net income or loss of these companies is included

in consolidated net income. Judgment regarding the level of influence over

each equity method investment includes considering key factors such as our

ownership interest, representation on the board of directors, participation in

policy-making decisions and material intercompany transactions.

The underlying net assets of the Company's equity method investment in

Alliance Boots include goodwill and indefinite-lived intangible assets. These

assets are evaluated for impairment annually or more frequently if an event

occurs or circumstances change that would more likely than not reduce the fair

value of a reporting unit below its carrying value. Based on testing

performed during fiscal 2014, the fair value of each Alliance Boots reporting

unit exceeded its carrying value. For certain reporting units, relatively

modest changes in key assumptions may have resulted in the recognition of a

goodwill impairment charge.

As of May 31, 2014, the Company continues to evaluate whether the fair value

of one of the Alliance Boots wholesale reporting units is below its carrying

value based on the Company's updated projections for that reporting unit. The

Company utilizes a three-month lag in reporting its share of equity income in

Alliance Boots, including for this reporting unit. Goodwill allocated to this

reporting unit by Alliance Boots as of February 28, 2014 was £257 million,

£116 million based on the Company's 45\% ownership percentage (approximately

$195 million using February 28, 2014 exchange rates). The Company will

continue to monitor this reporting unit in accordance with Accounting

Standards Codification 350, Intangibles - Goodwill and Other.

Income taxes -

We are subject to routine income tax audits that occur periodically in the

normal course of business. U.S. federal, state, local and foreign tax

authorities raise questions regarding our tax filing positions, including the

timing and amount of deductions and the allocation of income among various tax

jurisdictions. In evaluating the tax benefits associated with our various tax

filing positions, we record a tax benefit for uncertain tax positions using

the highest cumulative tax benefit that is more likely than not to be

realized. Adjustments are made to our liability for unrecognized tax benefits

in the period in which we determine the issue is effectively settled with the

tax authorities, the statute of limitations expires for the return containing

the tax position or when more information becomes available.

In determining our provision for income taxes, we use an annual effective

income tax rate based on full-year income, permanent differences between book

and tax income, the relative proportion of foreign and domestic income,

projections of income subject to Subpart F rules and statutory income tax

rates. The effective income tax rate also reflects our assessment of the

ultimate outcome of tax audits. Discrete events such as audit settlements or

changes in tax laws are recognized in the period in which they occur.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, as a new Topic, Accounting Standards Codification (ASC) Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a Company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for annual periods beginning after December 15, 2016 (fiscal 2018) and shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the effect of adopting this new accounting guidance but does not expect adoption will have a material impact on the Company's results of operations, cash flows or financial position. In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU raises the threshold for a disposal to qualify as discontinued operations and requires new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. Under the new standard, companies report discontinued operations when they have a disposal that represents a strategic shift that has or will have a major impact on operations or financial results. This update will be applied prospectively and is effective for annual periods, and interim periods within those years, beginning after December 15, 2014 (fiscal 2016). Early adoption is permitted provided the disposal was not previously disclosed. This update will not have a material impact on the Company's reported results of operations and financial position. The impact is non-cash in nature and will not affect the Company's cash position. In May 2013, the Financial Accounting Standards Board (FASB) reissued an exposure draft on lease accounting that would require entities to recognize assets and liabilities arising from lease contracts on the balance sheet. The proposed exposure draft states that lessees and lessors should apply a "right-of-use model" in accounting for all leases. Under the proposed model, lessees would recognize an asset for the right to use the leased asset, and a liability for the obligation to make rental payments over the lease term. When measuring the asset and liability, variable lease payments are excluded whereas renewal options that provide a significant economic incentive upon renewal would be included. The accounting by a lessor would reflect its retained exposure to the risks or benefits of the underlying leased asset. A lessor would recognize an asset representing its right to receive lease payments based on the expected term of the lease. The lease expense from real estate based leases would continue to be recorded under a straight line approach, but other leases not related to real estate would be expensed using an effective interest method that would accelerate lease expense. A final standard is currently expected to be issued in 2014 and would be effective no earlier than annual reporting periods beginning on January 1, 2017 (fiscal 2018 for the Company). The proposed standard, as currently drafted, would have a material impact on the Company's financial position and the impact on the Company's reported results of operations is being evaluated. The impact of this exposure draft is non-cash in nature and would not affect the Company's cash position.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report and other documents that we file or furnish with the Securities and Exchange Commission contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management's assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, on the Company's website or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls, conference calls and other communications. Some of such forward-looking statements may be based on certain data and forecasts relating to our business and industry that we have obtained from internal surveys, market research, publicly available information and industry publications. Industry publications, surveys and market research generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Statements that are not historical facts are forward-looking statements, including, without limitation, statements regarding our future financial and operating performance, as well as forward-looking statements concerning planned store closings in connection with our store optimization plan and the effects thereof, our investment in Alliance Boots GmbH and the other arrangements and transactions contemplated by the Purchase and Option Agreement and other agreements relating to our strategic partnership with Alliance Boots and their possible effects, our commercial agreement with AmerisourceBergen, the arrangements and transactions contemplated by our framework agreement with AmerisourceBergen and Alliance Boots and their possible effects, estimates of the impact of developments on our earnings, earnings per share and other financial and operating metrics, cough/cold and flu season, prescription volume, pharmacy sales trends, prescription margins, generic prescription drug inflation, number and location of new store openings, network participation, vendor, payer and customer relationships and terms, possible new contracts or contract extensions, competition, economic and business conditions, outcomes of litigation and regulatory matters, the level of capital expenditures, industry trends, demographic trends, growth strategies, financial results, cost reduction initiatives, impairment or other charges, acquisition and joint venture synergies, competitive strengths and changes in legislation or regulations. Words such as "expect," "likely," "outlook," "forecast," "would," "could," "should," "can," "will," "project," "intend," "plan," "goal," "target," "continue," "sustain," "synergy," "on track," "believe," "seek," "estimate," "anticipate," "may," "possible," "assume," variations of such words and similar expressions are intended to identify such forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that could cause actual results to vary materially from those indicated, including, but not limited to, those relating to whether the costs associated with our store optimization plan will exceed current forecasts, our ability to realize expected savings and benefits in the amounts and at the times anticipated, the impact of private and public third-party payers efforts to reduce prescription drug reimbursements, the impact of generic prescription drug inflation, the timing and magnitude of the impact of branded to generic drug conversions, the Purchase and Option Agreement and other agreements relating to our strategic partnership with Alliance Boots, the arrangements and transactions contemplated thereby and their possible effects, our commercial agreement with AmerisourceBergen, the arrangements and transactions contemplated by our framework agreement with AmerisourceBergen and Alliance Boots and their possible effects, the occurrence of any event, change or other circumstance that could give rise to the termination, cross-termination or modification of any of the transaction documents, the parties' ability to realize anticipated synergies and achieve anticipated financial, tax and operating results, the amount of costs, fees, expenses and charges incurred in connection with strategic transactions, the risks associated with transitions in supply arrangements, the risks associated with international business operations, the risks associated with governance and control matters in minority investments, whether the option to acquire the remainder of the Alliance Boots equity interest will be exercised and the financial, tax, operational and other ramifications thereof, the timing of decisions regarding such second step transaction and related decisions regarding the potential combined company, the risks associated with equity investments in AmerisourceBergen including whether the warrants to invest in AmerisourceBergen will be exercised and the ramifications thereof, changes in vendor, payer and customer relationships and terms, changes in network participation and reimbursement and other terms, the operation and growth of our customer loyalty program, changes in economic and business conditions generally or in the markets in which we or Alliance Boots participate, competition, risks associated with new business areas and activities, risks associated with acquisitions, joint ventures, strategic investments and divestitures, including those associated with cross-border transactions and the integration of large, complex businesses, the ability to realize anticipated results from capital expenditures and cost reduction initiatives, the timing and amount of any impairment or other charges, outcomes of legal and regulatory matters, and changes in legislation, regulations or interpretations thereof. These and other risks, assumptions and uncertainties are described in Item 1A (Risk Factors) of our most recent Annual Report on Form 10-K, and in other reports that we file or furnish with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. Except to the extent required by law, we do not undertake, and expressly disclaim, any duty or obligation to update publicly any forward-looking statement after the initial publication of such statement, whether as a result of new information, future events, changes in assumptions or otherwise.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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