After Walgreen's Saw Strong January Growth, Will CVS Surprise Investors?

In January, both Walgreen's and Rite Aid experienced some attractive top line growth. Is this a precursor for strong fourth-quarter results for CVS or will the company flop?

Feb 8, 2014 at 8:30AM

Wednesday, Feb. 5, 2014 was a good day for shareholders of Walgreen's (NASDAQ:WBA). After announcing sales for the month of January, shares of the world's second largest drugstore chain rose more than 3%, outperforming the 0.2% decline experienced by the S&P 500. In addition to experiencing growth itself, Walgreen's competitor, Rite Aid (NYSE:RAD) also saw some growth throughout January. With the second and third largest drugstore chains reporting positive growth, what does this say about CVS Caremark (NYSE:CVS), the world's largest drugstore chain, heading into earnings?

Sales were encouraging!
For the month, Walgreen's reported a 3.7% rise in sales to $6.39 billion from the $6.17 billion the company reported the same month a year earlier. In its release, the company attributes its success to a combination of additional locations in operation and a modest rise in comparable store sales. For instance, during the month alone, the business opened 12 new stores, bringing its total number of stores added over the past year to 139.

 Compared to the previous January, Walgreen's saw its comparable store sales rise 2.9%. This rise was due to a 3.8% jump in basket size (the value of products the average customer buys), but was negatively affected by a 2.2% decline in customer traffic. Although this sounds terrible, it's nice to see that you can have fewer customers but still see a rise in sales because such a trend typically leads to higher margins if it is sustainable.

For the month of January, Rite Aid reported a rise in comparable store sales. Compared to the same month a year earlier, the company saw its comparable store sales rise 1.8%. Just as in the case of Walgreen's, Rite Aid attributed its rise in sales for the month primarily to an increase in the company's Pharmacy sales. However, unlike Walgreen's, Rite Aid saw its front-end sales fall for the quarter, mostly due to flu-related over-the-counter products.

What implications will this have for CVS?
While it's nice to see comparable store sales rise at both Walgreen's and Rite Aid, the news is likely putting some pressure on CVS. With a market cap of nearly $80 billion, CVS is about $18 billion larger than both Walgreen's and Rite Aid combined. Interestingly, despite the company's size, CVS has demonstrated the greatest amount of growth recently.

Over the past three fiscal years, CVS has seen its revenue rise an impressive 29% from $95.8 billion to $123.1 billion. In comparison, between 2010 and 2012, Walgreen's revenue rose only 6% from $67.4 billion to $71.6 billion, while Rite Aid's grew only 0.7% from $25.2 billion to $25.4 billion.

For its fourth quarter of 2013, CVS is expected to ring in sales of $32.7 billion, 4% higher than the $31.4 billion the company reported the same quarter a year earlier. On the basis of profitability, Mr. Market has even higher expectations for CVS. If analysts are right, the company's earnings per share should come in at $1.11. This would represent a 23% gain compared to the same quarter in 2012.

Foolish takeaway
So far, both Rite Aid and Walgreen's have reported nice comparable store sales. Although this is good for shareholders of both companies, it will likely place very high expectations on CVS to report strong quarterly metrics on Tuesday, Feb. 11. Heading into the company's earnings, it's difficult to tell what to do but with a strong history of revenue growth, combined with attractive January sales posted by its peers, now might be a great time to consider buying shares of CVS for the long run.

The future of retail
As retailers, Walgreen's, Rite Aid, and CVS all have the potential to grow significantly over time.  But are any of these three companies the two companies that The Motley Fool believes can become true cash kings?  To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

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.

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