Is CVS Gearing up to Kill Rite Aid?

A look at CVS Caremark's new strategy to take down Rite Aid and GNC.

Jan 12, 2014 at 2:25PM

On Monday, CVS Caremark (NYSE:CVS) announced the launch of its new Family Vitamin Center. The project is being implemented online and it encourages customers to buy vitamins and supplements due to their various health benefits. For consumers this is a good thing, but for Rite Aid (NYSE:RAD) and GNC Holdings (NYSE:GNC) it could create some problems.

A look back at Rite Aid and GNC                                                                                                                                                       Since 1998, Rite Aid and GNC have been working together to grow their businesses in concert. This endeavor began as a partnership agreement that would require Rite Aid to add GNC locations within Rite Aid stores. By the end of 2012, there were 2,181 GNC stores set up inside of Rite Aid locations. While these stores represented 26.8% of GNC's store count, they made up only $60.75 million (or 2.5%) of the company's consolidated revenue.

To put this in perspective, the agreement between these two companies brought in revenue for GNC that amounted to less than $28,000 per store. These sales figures are dwarfed by the nearly $368,000 in revenue per location that GNC sees from its stand-alone outlets. However, what the deal lacked in revenue was made up for in profits. In 2012, GNC saw an operating margin of 40.3% from these locations. This is slightly higher than the 33.4% operating margin GNC earned through its franchised locations and far higher than the 19.4% seen in its retail segment.

Rite Aid does not provide financial results specific to its GNC partnership, but the company renewed its agreement to add an additional 300 GNC locations within its stores through 2019. This would bring the company's total count to more than 2,500 locations and is strong evidence that the financial results of this partnership must be positive.

CVS steps up its game                                                                                                                                                                         In an effort to grab as much market share as it can, CVS has done all it can to grow in size. Between 2008 and 2012, the company's number of locations has grown by 7.7% from 6,923 to 7,458. Over that same time-frame, sales have jumped an impressive 40.8% from $87.5 billion to $123.1 billion. In comparison, Rite Aid has seen its store count fall 5.7% from 4,901 to 4,623 over the past five years, while its sales have fallen 3.4% from $26.3 billion to $25.4 billion.

This situation has occurred because these companies have different goals. In four of the past five years, Rite Aid has posted net losses. Almost every year, this metric improves, but the only reason has been the company's decision to consolidate its business by closing unprofitable locations and focus on reducing costs wherever possible.

CVS, on the other hand, has had a very different agenda. As opposed to aiming its efforts toward cost reduction, management has done everything it can to grow sales. The upside to this strategy is that it allows the company to grab a hold of a larger market share quicker, but there is some downside.

For starters, the company will have to forgo profit now in the hope that it can achieve greater returns down the road. This has already been demonstrated by the trend in the company's net profit margin, which has fallen every year since 2010 from a high of 3.8% to 3.1%. Second, this strategy grants other companies opportunities to focus more fiercely on engaging in price wars, which could result in even smaller margins and, possibly, failure for CVS. A great example of the second scenario can be seen by looking at Kmart. It was Kmart's decision to try to beat Wal-Mart on price that brought about the company's downfall and subsequent merger with Sears Holdings in 2005.

In an attempt to grab even more market share and potentially offset the lower margins that have come with its growth, CVS likely decided to adopt a business model not too different from Rite Aid's. The company understands that the margins that GNC earns from its partnership with Rite Aid are large and growing. To capitalize on this, CVS decided to develop its own vitamin and supplement-oriented offering that avoids bringing in an additional partner so that it can either A) earn larger margins than Rite Aid has, or B) lower its prices to try and pressure Rite Aid and GNC out of the market.

Foolish takeaway                                                                                                                                                                                   Based on the evidence provided, investors can see that CVS has a very growth-oriented agenda. The downside to this growth is that it results in lower profitability for the company now but grants it an opportunity for a brighter future if the company's business operates appropriately. However, after seeing Rite Aid and GNC, two competitors profiting from one another by working in concert to grow their enterprises, CVS decided to reach for the low-hanging fruit by setting up its own vitamin and supplement-oriented operation.

Unfortunately, it will likely be months before any results come in regarding the website's launch, but with its larger market share and superior resources, investors shouldn't be surprised to see CVS profit while Rite Aid and GNC suffer moving forward. For this reason, the Foolish investor would be wise to keep a close eye on both Rite Aid and GNC for any financial releases that talk about the performance of their partnership, as any bad news could mean significant downside for Rite Aid and some minimal downside for GNC.

How will Obamacare impact your investments?
Obamacare seems complex, but it doesn't have to be. In only minutes, you can learn the critical facts you need to know in a special free report called Everything You Need to Know About Obamacare. This FREE guide contains the key information and money-making advice that every American must know. Please click here to access your free copy.

Daniel Jones has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers