CVS Stops Smoking, Strengthens Strategy Shift

CVS Caremark recently announced a fundraising campaign to benefit Lung Force. This effort dovetails with the company’s plan to stop selling tobacco products in October 2014.

Jun 20, 2014 at 12:01PM

CVS Caremark (NYSE:CVS) announced that it plans to stop selling tobacco products earlier this year. Now the company is involved in a fundraising campaign to support Lung Force, an initiative launched by the American Lung Association (ALA). The goal is to raise awareness about the threat lung cancer poses to women -- it is the leading cause of cancer-related death in women (surpassing breast cancer in 1987). The campaign runs until June 29, 2014.

Why this matters
This is relevant since it is tied to CVS Caremark's plan to stop selling tobacco products in October 2014. First, aligning the company with the ALA is part of the company's broader strategy to become a health care provider by expanding its MinuteClinic services.

MinuteClinic has more than 800 locations in 28 states and the District of Columbia. Nurse practitioners and physician assistants offer health care services that include vaccinations for flu, pneumonia, and hepatitis, routine lab tests, and wellness services such as the "Start to Stop" smoking cessation program. 

While CVS' first-quarter financial report released last month was a mixed-bag, MinuteClinic revenue grew by 11%.

This is important because CVS anticipates losing $2 billion from it tobacco shoppers; however, the company believes the losses will be incrementally offset by the expansion of its MinuteClinics. The company will be opening more clinics as well as offering more services, like infusion therapy for treating diabetes and other illnesses.

Moreover, working along side the American Lung Association will enhance the company's brand as it relates to its stance on corporate social responsibility.

CVS Caremark's corporate social responsibility position
In May 2014, CVS announced the release of its 2013 corporate social responsibility, or CSR, report. The report highlights Initiatives that include becoming a provider of health care services and stopping tobacco sales is a key to CSR.

The report also discussed issues like the company's progress on its goal to reduce carbon intensity 15% by 2018, its enhanced focus on product stewardship, and its other health and wellness initiatives. An overarching theme of the CSR report was the company's intention to stop selling cigarettes and provide smoking cessation programs to its customers.

In short, the report highlighted how the sale of cigarettes and tobacco conflicted with CVS' purpose as a health and that ceasing tobacco sales "aligns CVS Caremark with our PBM clients, health plans and health plan provider partners who, like us, are working to improve health outcomes, reduce chronic disease and control costs."

What this means for investors
Investors need to consider where the share price will go next in light of an anticipated loss of $2 billion in revenue from halting tobacco sales. But CVS continues to be a leader in the retail pharmacy sector in a number of ways. The company is the leading seller of generic prescription medications and its financial performance over the past year has been solid.

Furthermore, the company is transitioning toward becoming a larger health care service provider by expanding its MinuteClinics and this will result in a greater source of revenue going forward. Finally, the company has taken a number of other steps that will also foster future growth, particularly by enhancing its previous alliance with Cardinal Health, which will fortify CVS' position as the leader in generic drug sales.

The companies announced a 50/50 joint venture in December 2013 that will form the largest generic sourcing vehicle in the U.S. The strategic alliance will enhance each outfits leadership position in generic drug distribution and sales while enhancing value for their customers, clients and shareholders.

CVS and Cardinal Health are combining their sourcing and supply chain expertise in the distribution of generic drugs. The venture is slated to be up and running by July 1. The agreement has an initial term of 10 years. Furthermore, the agreement requires Cardinal Health to make quarterly payments of $25 million during the term to CVS.

The bottom line
In short, long-term investors can expect to see continued earnings growth and solid share price performance at CVS. And the company's CSR initiatives also make this a good play for investors who factor ethics and sustainability into their fundamental calculus.

CVS Caremarks' anti-smoking posture sets a high bar in corporate social responsibility for rivals like Rite Aid (NYSE:RAD). While the company has yet to say whether it will follow CVS' lead, the retail pharmacy chain is also moving into the health care services sector.

Rite Aid's acquisition of Texas-based RediClinic gives the retail pharmacy a clinical presence of 30 retail mini-clinics in several metropolitan areas. The company will operate as a subsidiary of Rite Aid, which plans a bold expansion of 70 new clinics through 2015.

The company reported its fiscal 2015 first-quarter earnings before the opening bell today. Rite Aid reported a profit of $0.04 per diluted share-a 55% decline from the same period a year ago when the company EPS of $0.09. The decline was attributed to lower reimbursement rates, as well as higher salary and payroll expenses caused its quarterly profit decline. But first-quarter revenue increased 3% to $6.5 billion, up from $6.3 billion in the first quarter of fiscal 2014.

Beyond the earnings horizon, it might be a good play for Rite Aid to follow CVS' lead by kicking the tobacco habit. Meanwhile, CVS Caremark's successful business model and commitment to corporate social responsibility might be good reasons for long-term investors to follow it off of the tobacco farm.

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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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