CVS Caremark: Everyone Should Love a Quitter

By now, consumers and investors alike have probably heard the news that CVS Caremark (NYSE: CVS  ) will stop selling tobacco products at every one of its pharmacy locations by October.

The bold move makes sense for the major pharmacy retailer and looks to be a positive development for all involved: the company, its shareholders, and consumers.

Calling it quits
On Feb. 5, CVS Caremark released a statement announcing its intention to become the first national pharmacy chain to stop all sales of tobacco products to consumers. With more than 7,600 locations, the move is pretty substantial for the company.

In addition to ending all sales of tobacco products, CVS is also enacting a smoking-cessation program. Expected to begin this spring, the program will aim to provide a broad array of anti-smoking resources to CVS' pharmacy-plan members.

CVS President and CEO Larry J. Merlo explained in a company statement: "As a leader of the health care community focused on improving health outcomes, we are pledging to help millions of Americans quit smoking."

Side effects
The move will no doubt create a revenue shortfall for CVS Caremark, at least in the beginning. The company estimated that it would lose approximately $2 billion in annual revenue from its tobacco shoppers, which would equate to roughly $0.17 per share. For fiscal 2014, the move is expected to cause a decrease in earnings in the range of $0.06-$0.09 per share.

However, management explained in the company statement that it has already identified other opportunities to offset much of the profit loss. There is also the obvious idea that the large amount of suddenly free shelf space can be replaced with higher-margin items. Regardless, the company no doubt stands to lose customers who soon won't be able to depend on CVS for their smoking fix.

A healthy choice

Forgetting the revenue shortfall for a moment, the move to eliminate tobacco products is a smart one for a company that prides itself on consumer health and wellness. A simple look at the corporate website shows just how health-conscious CVS is.

The 'about' section of CVS Caremark's corporate page explains, "Staying healthy isn't easy these days...So we're reinventing pharmacy to help people on their path to better health." Certainly the latest anti-smoking move for the company is a reinvention of pharmacy, at least domestically. 

However, as my friend Anna pointed out to me last week, the move is not as crazy as it may seem. Having lived in Italy half her life, she explained that European pharmacies do not sell tobacco products simply because the concept is at odds with the entire notion of what a pharmacy is, which is purely medicinal in nature.

This begs the question: why do most major pharmacies in the US still sell tobacco products? The answer is simply, and not surprisingly, to make more money! The proof is that after CVS Caremark announced its bold intentions to stop selling tobacco products, shares of competitor Walgreen (NYSE: WAG  ) climbed approximately 9% in days, as the company appears poised to capture much of CVS Caremark's tobacco shoppers.

However, the bigger unknown is whether industry giants like Walgreen and even smaller competitors like Rite Aid (NYSE: RAD  ) will follow in CVS' footsteps. In the end, I don't think it will matter, at least not to CVS, its shareholders, and consumers.

CVS is blazing a trail in American pharmacy. It is a move that will win over new consumers over time, as the company is showing a real commitment to helping consumers live healthier lives. How often is it that a major retailer willingly chooses to forsake revenue to help out consumers? It is definitely pretty rare!

Still a growth leader
Even with the hit to sales, CVS is still projected to grow well in its current fiscal year. The following is a breakdown of the company's growth projections compared to smaller competitors Rite Aid and Walgreen: 

Company Revenue Growth EPS Growth
CVS Caremark 4.9% 11.7%
Rite Aid 0.9% 54.5%
Walgreen 4.8% 10.6%
 

*Walgreen fiscal year ends August
*Rite Aid fiscal year ends February; fiscal 2015 represented above   

The above data indicate that even with the hit to revenue and earnings that management expects in 2014, CVS is still expected to do very well in comparison to peers. Rite Aid's impressive projected earnings-per-share growth is a result of the company's recent turnaround and restructuring of stores.

Everyone should love a quitter
CVS Caremark has taken a bold and important first step in changing the American pharmacy landscape. While the company will experience a slowdown in sales and earnings in the short term as a result of its ban on all tobacco products, CVS' strong dedication to its consumers should translate into long-term customer loyalty.

As the pharmacy landscape, and health care in general begins to change, companies like CVS Caremark will remain at the forefront thanks to unprecedented dedication to consumers.

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