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CVS Loses Its Beauty

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It was an interesting experiment, but it seems to have failed. CVS Caremark (NYSE: CVS  ) announced it would shutter all 25 of its Beauty 360 stores, a mini-chain stocked with upscale cosmetic goods. The high-margin luxury segment is a tempting one to enter, particularly for a rather plain-Jane midmarket drugstore operator like CVS. However, the blend of fancy cosmetics and ordinary retail/pharmaceutical offerings is a difficult one, and apparently the company just couldn't make it work. The question is, has it missed a sweet chance to boost its bottom line or is this a clever strategic retreat?

Competent at the core
CVS is one of the bigger and better drugstore chains on the stock market. It's been consistently profitable over the years, and revenue has crept up of late. It's also efficient, boasting a much higher sales-per-store metric than its most comparable rivals Walgreen (NYSE: WAG  ) and Rite-Aid (NYSE: RAD  ) .

CVS also has the best potential, according to analysts who track the company. These folks anticipate that EPS will grow by 11.29% over the next five years. Meanwhile, Walgreen's profitability is expected to deteriorate slightly while the poorly performing and heavily indebted Rite-Aid should continue to post net losses. In terms of anticipated two-year growth, CVS also tops almighty Wal-Mart (NYSE: WMT  ) . This, despite Wal-Mart's immense purchasing power and its celebrated skill in managing inventory.

Beauty 360 was a misstep for CVS, but an understandable one. It's already firmly entrenched in the retail beauty business, so why not make a stab at pushing more expensive products? Drugstores generally operate at net margins of 3%-4%, and CVS is no exception. If Beauty 360 were to succeed and become a thriving business, those numbers would stand a good chance of climbing significantly.

A company like CVS, though, isn't really designed to sell luxury. Drugstores are a volume business and succeed by managing inventory well, bulk-buying prescription drugs as cheaply as possible for their pharmacy operations, and bringing thousands of customers into their stores. Luxury demands a high degree of expertise and attention, and its specialized and more personal approach runs counter to the way a mass retailer approaches its market.

Besides, the segment Beauty 360 operated in is hardly an underexploited niche. European high-end retail conglomerate LVMH, for example, has enjoyed plenty of success with Sephora, a busy and successful chain that moves a lot of the products Beauty 360 tried to push. The difference is, LVMH specializes in luxury and knows much better how to get those goods off the shelf. CVS does large-scale retail and pharmaceutical rather well; the fancy stuff, not so much.

CVS also didn't time its Beauty 360 roll-out too expertly -- the first store opened in late 2008, when the country was gripped by recession. It was a bad time to sell high-margin products, no matter how pretty they made people look. Fortunately, the company never went overboard with its luxury cosmetics purveyor, opening only 25 stores in the ensuing years. Compared to the more than 7,300 CVS outlets, that's a tiny number.

Three-plus years was enough time to gauge whether those 25 would bring in the customers. It's admirable that the company's throwing in the towel, as opposed to stubbornly chucking good money after bad to make a failing business work. Not long after the last Beauty 360 shuts its doors for good (which should happen in May), CVS will have to take a financial charge... but this probably won't hurt its results all that much given the size of its regular operation. The company does what it does quite effectively, and it's good to see that it's getting back to its core competencies, even if they're not sexy or luxurious or particularly high-margin.

CVS is a good candidate for any portfolio, but it's not the only retailer that looks juicy these days. We've identified a few other stocks from the sector that currently have good potential upside. You can read all about it in this free report. Just click here to access the report now.

Fool contributor Eric Volkman has no positions in the stocks mentioned above. The Motley Fool owns shares of Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (3) | Recommend This Article (0)

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  • Report this Comment On April 03, 2012, at 4:07 PM, ScubaStClaire wrote:

    CVS learned a lot from the experiment. Last year they launched the CVS/pharmacy "Beauty Club" that already has 10 million members and they launched a line only sold by CVS, "Nuance Salma Hayek", that has exceeded its sales expectations. CVS has one of the largest loyalty card systems which allow them to identify sales growth opportunity and target their customers with what the customer is looking for.

  • Report this Comment On April 09, 2012, at 3:27 AM, TMFVolkman wrote:

    Agreed. The Salma Hayek line was one of the big reasons for the closure, it seems. That's a big seller and the company doesn't need a separate boutique retailer in order to move it off the shelves. So why bother with Beauty 360?

    I would expect them to launch more upscale product lines in the future.

  • Report this Comment On April 13, 2012, at 3:58 AM, beautyexpert wrote:

    Overall, this was a excellent article about Beauty 360. But, I also noticed a few inaccuracies. The first two Beauty 360 stores were launched in 2008 in Washington DC and Ridgefield CT.The remaining 23 stores were launched in CA in 2010. You also fail to mention that Beauty 360 stores were staffed by licensed professionals (estheticians and cosmetologists.) Also, all the stores offered professional services such a facials, brow shaping and professional make-up application. The original launch teams received four weeks of training before the CA stores launch in 2010. The staff at Beauty 360 stores were among the most highly trained and professional sales consultants in the beauty industry.

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