CVS Caremark Corporation’s Profits Rise Despite Increasing Competition From Rite Aid Corporation

CVS recently posted mixed first-quarter results; but investors should focus on continued growth in the retailer’s pharmacy benefit management and pharmacy services segments.

May 13, 2014 at 5:30PM

CVS Caremark Corporation (NYSE:CVS)reported mixed financial results for the first quarter of 2014 on May 2, 2014. The company's profits continued to rise as did its earnings per share. However, the EPS figure came in slightly below expectations and same-store sales also declined  which management attributed to "unforeseen weather related issues."

CEO Larry Merlo said on the earnings call, "it's unusual to hear us talk about the impact of weather on our business...but this quarter the amount of severe weather was so abnormal that quite frankly it's hard not to talk about." 


Whether that's true or if other circumstances affected sales like a broader consumer pullback because of the ever so slowly recovering economy, or competition from discount dollar stores remains to be seen. But CVS' strengths in pharmacy services and medication scripts still make the company a good choice for long-term investors.

Let's talk about CVS' results
CVS' earnings per share came in at $1.02 for a 22.9% improvement year-over-year, but this was short of the company's guidance of $1.03-$1.06 per share. Furthermore, same-store sales fell by 3.8% which of course raised alarm bells for some analysts. Meanwhile, net revenue was up by 6.3% year-over-year to $32.69 billion.


Furthermore, revenue from the pharmacy services segment climbed 10.3% to $20.2 billion in the second quarter. The gains in this segment stemmed from growth in the retailer's specialty pharmacy business, including the acquisition of Coram Infusion in the fourth quarter of 2013. Coram is a leader in infusion therapy and internal nutrition, especially in relation to diabetes management.

Mr. Merlo noted that "the integration is going well; our sales forces are being aligned and we are beginning to develop integrated products for both hospitals and health plans."

This is critical as CVS evolves into a broader health-care provider by way of its MinuteClinics. The company previously announced its intention to open more of these clinics in 2014; and the Coram Infusion acquisition will enhance the services that these clinics already provide.

The payments for these services should currently be covered by consumers' health plans and/or Medicaid because of the Affordable Care Act mandates. And Mr. Merlo mentioned in the call this will be good for CVS in the long run.

"We have seen a slight positive impact on our results from growth in the Medicaid segment and we continue to believe that CVS Caremark is well-positioned to serve these new customers across our enterprise assets," Merlo said. 

In other words, provided that the health-reform measure reaches its potential, the ACA will bring more business to the company's health clinics as well as other retail pharmacies like Rite Aid (NYSE:RAD) that offer these services.

Prescriptions continue to drive gains
Ultimately, CVS' market-share lead in prescription medications continues to drive its profits. And the enhanced strategic alliance with Cardinal Health will make it more efficient at delivering generic prescriptions to the marketplace while lowering its costs.

The 10 year agreement between Cardinal and CVS will create "the largest generic sourcing facility" in the U.S. The companies have a long standing relationship in generic drug distribution and this new agreement will deepen that relationship and build on the expertise of each business in this regard.

Goodbye tobacco road
One big question for investors is the extent to which the elimination of tobacco sales in October 2014 will impact comps in the fourth quarter. As has previously been reported, CVS will stop selling tobacco products. These sales account for $2 billion in annual revenue for the company.

CVS said at the time that this might affect earnings per share by $0.17, but the losses would be offset by incremental opportunities which would position the company for continued long-term growth. Mr. Merlo also stated that CVS' front-store comps will improve for the rest of 2014, notwithstanding the impact of exiting the tobacco category.

In short, CVS plans to expand its clinical services by opening more MinuteClinics while enhancing the available treatments at these locations. That expansion will be coupled with its pharmacy benefit management services and leadership position in prescription drug share for future growth. Investors will be hard-pressed to bet against CVS Caremark in this regard.

Rite Aid is in the rearview mirror
Rite Aid's recent earnings report excited the Street, and the company has positioned itself for future growth as it expands its clinical services. This move will also help Rite compete more effectively with CVS.

Rite Aid's adjusted earnings came in at $0.10 per share, an increase of about 43% year-over-year. Going forward, the company anticipates revenue in a range from $26.0-$26.5 billion through 2015. The pharmacy retailer also expects comparable-store sales growth in a range of 2.5%-4.5% and EPS in a range of $0.31-$0.42.

Rite Aid also recently announced the acquisition of RediClinic. This clinical services provider currently runs 30 retail mini-clinics in several metropolitan areas in Texas. The company will operate as a subsidiary of Rite Aid, which plans a bold expansion of 70 new clinics through 2015.

Final Foolish remedy
Rite Aid's acquisition of RediClinic is obviously designed to catch up to its bigger rival CVS Caremark. However, CVS remains the leader in prescription drug sales and the agreement with Cardinal Health will boost its profits. The company is also well-positioned for future growth in its specialty-pharmacy business because of its Coram Infusion acquisition.

In sum, the company will not suffer much from the first-quarter decline in comps. Investors should also be comforted by CVS' proven success and track record of delivering solid returns.

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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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