CVS 'Solid' In First Quarter

May 2, 2014

Despite severe weather-related issues during the first quarter, CVS reported "solid results" across the enterprise and executives expressed optimism in achieving 2014 goals.

"It is unusual to hear us talk about the impact of weather on our business.  Historically, it has been our practice to not blame the weather when we explain our results, but this quarter the amount of severe weather was so abnormal that, quite frankly, it is hard not to talk about it," Larry Merlo, president and CEO told analysts during Friday morning's conference call to discuss results.  "...While disappointed that the severe weather put a damper on an otherwise excellent quarter, we remain very confident in our outlook for the full year."

Net income during the quarter rose 18.3% to $1.1 billion, compared with approximately $1 billion in the year-ago period.  Adjusted earnings per share for the three months ended March 31, 2014 and 2013, was $1.02 and $0.83, respectively, an increase of 22.5%.

Net revenues for the three months ended March 31, 2014, increased 6.3% to $32.7 billion versus the year-ago period.

Revenues in the pharmacy services segment increased 10.3% to $20.2 billion during the quarter, primarily driven by growth in its specialty pharmacy business, including the acquisition of Coram, as well as drug cost inflation, new clients and new products.

Speaking of the specialty pharmacy business, Merlo told analysts that it remains strong with revenues up about 34% year-over-year.  He noted that the integration of Coram is "going well," as the sales forces are being aligned and integrated products are being developed.

Merlo also said that the rollout of its new Specialty Connect offering is expected to be completed at the end of the quarter.  Specialty Connect is analogous to Maintenance Choice as it connects mail and retail capabilities to provide choice and convenience for members.

"We are positioned to continue to gain share in the fast-growing specialty marketplace as we developed innovative offerings that capitalize on our unique ability to optimize cost, quality and access," Merlo told analysts.

Revenues in the retail business increased 2.7% to $16.5 billion during the quarter.  Same-store sales increased 1.4% with pharmacy same-store sales up 3.8% and front store same store sales down 3.8%.  Both front same-store sales and pharmacy same-store sales were negatively impacted by a weaker flu season in the three months ended March 31, 2014 and severe weather across much of the United States, compared with the prior year, the company stated.

Despite the decline in front same-store sales, front store basket size improved modestly while front store margins improved notably during the quarter.  The increase in total same-store sales was primarily driven by the growth of prescription volumes and brand name drug cost inflation.  Pharmacy same store sales include a negative impact of approximately 120 basis points from recent generic drug introductions, the company noted.

Merlo stressed the importance of developing a sustainable front-end strategy and said that, as rivals increased promotional activity, CVS/pharmacy reduced its circular ad blocks year-over-year by about 6%.

"As a result of staying true to our targeted promotion strategy, I'm pleased to say that we saw growth in our average basket size, along with notable growth in our front store margin in the quarter.  Of course, we would like to see better front store comps but it is important that we have a sustainable front-end strategy."

For example, through insights from its ExtraCare loyalty program and its predictive modeling for personalized emails, it has experienced email open rates that are two times the industry average and response rates that are five times the industry norm.  Furthermore, the CVS/pharmacy ExtraCare Beauty Club is enjoying the impact of personalization as it has engaged 13 million of the company's best beauty customers, and the members are spending more than twice as much as the average beauty customer.

With regard to MinuteClinic, revenues were up 11.4% during the quarter.  There are currently 828 clinics in operation with plans to open at least 150 new clinics this year.  Of the new openings, about one-third will be in new markets.

Looking ahead, CVS Caremark confirmed its earnings guidance range for the full year 2014 and expects to deliver adjusted EPS of $4.36 to $4.50 and GAAP diluted earnings per share from continuing operations of $4.09 to $4.23 in 2014.  The retailer also continues to expect to deliver 2014 free cash flow of $5.5 billion to $5.8 billion, and 2014 cash flow from operations guidance of $7 billion to $7.3 billion.

"All the ongoing changes that we are seeing in the healthcare environment are certainly creating unique opportunities for CVS Caremark.  Our unmatched model in innovative solutions makes us well positioned to capitalize on these opportunities and we believe creates a sustainable competitive advantage," Merlo told analysts.

Source: Retailing Today