Will Retail Pharmacies Follow CVS and Stop Cigarette Sales?

CVS Caremark announced it will end sales of tobacco products by Oct. 1. But will other retail drug chains follow CVS’ lead?

Mar 31, 2014 at 2:00PM

CVS Caremark (NYSE:CVS) announced in February it will stop selling tobacco products by Oct. 1. This plan goes hand in hand with the company's expansion of its MinuteClinic services. CVS is the first national pharmacy to quit tobacco sales. But whether other retail pharmacies with mini-clinic services will follow CVS' lead is unclear.

Attorneys General urge retailers to stop selling tobacco
On the heels of the CVS announcement, 28 U.S. attorneys general sent letters to five major retailers urging the companies to stop selling tobacco products. The letters were sent earlier in March to drugstore chains Walgreen (NASDAQ:WBA) and Rite Aid (NYSE:RAD), supermarket operators Kroger and Safeway as well as retail giant Wal-Mart.

These companies have yet to announce their intentions. But CVS' wise move combined with pressure from the gang of 28 might prompt these companies to kick the tobacco habit. The plea by the attorneys general was spearheaded by New York Attorney General Eric Schneiderman.

According to Reuters, Mr. Schneiderman said in a statement, "Pharmacies and drug stores, which increasingly market themselves as a source for community health care, send a mixed message by continuing to sell deadly tobacco products."

CVS' smoking-cessation angle
CVS is expanding its MinuteClinic services. Currently there are more than 800 locations providing services like vaccinations, routine lab tests, and a variety of wellness services including its "Start to Stop" smoking-cessation program.

CVS is also kicking off a smoke-quitting campaign that will include information and treatment on smoking cessation at its retail outlets, MinuteClinic locations as well as online. The company said ending tobacco sales will cost about $2 billion in annual revenue, or $0.17 per share. The retail drugstore believes expanding MinuteClinic's range of services will make up for revenue losses, however.

CVS Caremark's move is wise as it transits into a broad-based health care provider by expanding MinuteClinic services. The company already leads the retail- pharmacy sector in generic-drug sales, and overall pharmaceutical sales drive CVS' profits.

And the company's fourth-quarter and year-end financial report released last month was solid. More importantly, guidance for the rest of 2014 calls for continued earnings growth. In other words, kicking the habit will not adversely affect the company's bottom line.

What this means for Rite Aid
Obviously there is mounting pressure on Rite Aid to follow CVS and stop tobacco sales. But Rite Aid continues to sell tobacco products while also offering its customers a variety of smoking-cessation products.

Meanwhile, the company recently announced a new program, Rite Aid Health Alliance. This is a health-management collaboration among various health-care providers that offers comprehensive care and support to customers with chronic health conditions like congestive heart failure, chronic obstructive pulmonary disease, high cholesterol, and diabetes.

Patients with these conditions are recommended to the program by primary-care physicians. The Alliance is comprised of Rite Aid pharmacists and specially trained care coaches located in the chain's pharmacies. They collaborate with physicians and patients on a continuing basis to improve patients' overall health care.

This is similar to CVS' MinuteClinic (where referrals are not required), so it seems that following CVS' lead is a no-brainer.

Walgreen is still smoking
Meanwhile, Walgreen does not appear to have immediate plans to halt cigarette sales. In light of the CVS plan, and the attorneys general letter, this might seem counterintuitive. The company is the largest pharmacy chain in the U.S.

Like its competitors, Walgreen also operates clinics that feature infusion and respiratory services. The company's "Take Care Health Systems" subsidiary manages more than 700 in-store care clinics and worksite health and wellness centers.

The retail-pharmacy chain reported solid second quarter results this week for the 2014 fiscal year but made no mention of the cigarette peddling issue.

The financial report showed adjusted second quarter earnings per diluted share of $0.91 compared with adjusted earnings per diluted share of $0.96 in the year-ago quarter. At the same time, second quarter sales rose by 5.1% to $19.6 billion as total sales in comparable stores were also up by 4.3%. So it does not seem that Walgreen's sales are about to go up in smoke.

A Fool's read of the smoke signals
CVS has taken the lead with its plan to end tobacco sales. And the attorneys general letter may appear to be a benign gesture at this juncture. But where there's smoke there may be fire. In my opinion, this could be an opening salvo in a possible future legal action.

In other words, it will behoove Walgreen and Rite Aid to follow CVS' lead and read between the lines of the attorneys general letter. Like the song goes, smoke gets in your eyes. And that might not be a good thing for the retail pharmacies' customers and investors.

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Kyle Colona has no position in any stocks mentioned. The Motley Fool recommends CVS Caremark. 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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