Management Forecasts at Walgreen Company: The Best Laid Plans

Abstract

This paper provides a unique comparison of a firm?s own confidential financial forecasts and what actually transpired. In January 1990 the Walgreen Company, the national leader in the drugstore industry by sales and profit measures, generated five-year financial projections solely for internal use. They reveal how Walgreen Company planned to allocate its expanding annual cash flows: despite reinvestment of cash into ongoing expansion at a record rate and periodic dividend increases, the Company planned to hold $1.05b in cash and marketable securities in 1994. In striking contrast to Walgreen?s internal forecasts, the firm held only $108.4m in 1994 -almost $1 billion less than projected. This paper examines in detail the causes and consequences of the deviations from the company?s plans. While many financial ratio measures indicate excellent performance over this period, other data hint that agency concerns may well be relevant even in a high growth firm like Walgreen Company. The findings in this paper suggest that whether in the future companies like these will be able to successfully defend themselves against the perils raised by Jensen (1993) depends vitally on a firm?s ability to adapt and respond as its growth opportunities change.