Did CVS Burn Itself by Banning Tobacco Sales?

CVS Caremark (NYSE: CVS  ) warned earlier this year that its decision to ban tobacco sales from all of its stores would come with costs, but investors may not have realized just how widespread they would be.

CVS Caremark will stub out all tobacco sales at its stores come Oct. 1. Photo: SXC.hu.

The retail pharmacy leader declared in February that it would stop selling cigarettes at all of its 7,600 drugstores by Oct. 1. It said it would be hypocritical to advocate for better consumer health when it was also selling products that are a leading cause of sickness and death.

CVS said it sold some $1.5 billion worth of tobacco in 2013, an admittedly small percentage of its $127 billion in total revenue. However, the company said that aside from the revenue lost, eliminating tobacco sales would stub out as much as $0.17 per share annually from earnings, or almost 5% of the 2013 total. For the current fiscal year, however, the impact would only amount to between $0.06 to $0.09 per share, because of the ban's timing.

During the pharmacy chain's second-quarter earnings conference call, it confirmed that it remains on track to see sales fall by $2 billion this year, but what may have caught some unawares was the impact on sales beyond cigarettes. CVS said a broad basket of goods was also going wanting as a result of the ban.

Although front-end same-store sales dropped only 0.4% in the quarter because a number of stores still sell tobacco ahead of the Oct. 1 end date, CFO David Denton said that CVS expects front-store comps to be "negatively impacted" by as much as four or five percentage points in the third quarter and to worsen further in the fourth as the negative effects from kicking the tobacco habit doubles the comps' decline. 

Dollar for dollar
So far, rivals such as Walgreen and Rite Aid have failed to follow CVS' lead despite pressure form doctors, politicians, and state attorneys-general. Although the retailers have publicly taken a wait-and-see approach, the precipitous drop in CVS sales may convince them it's better to fight than switch.

Pharmacies are also feeling the competitive effects of deep discount dollar stores and convenience stores that are luring in customers with new and varied products. Dollar General (NYSE: DG  ) recently said that strong tobacco sales since it introduced the products into its consumables category enabled the segment to far outpace the growth witnessed in nonconsumables last year. Total sales jumped 9.2% in 2013 to $17.5 billion, with same-store sales 3.3% higher as traffic and average transaction amount rose.

Similarly, Family Dollar pointed to tobacco as a primary cause for the robust sales growth it enjoyed last year and for the first six months of 2014. Though third-quarter comps fell 1.8% due to fewer customer transactions, the company's results were likewise best in consumables because of strong growth in tobacco.

E-cigarettes too?
Convenience stores have also recently grabbed hold of the latest trend in smoking -- electronic cigarettes -- an area that CVS has voluntarily excluded itself from, saying it prefers to wait until the FDA issues regulations.

Up in vapor. CVS won't be participating in e-cig revolution. Photo: Vuse Vapor.

This is a fast-growing segment of the tobacco industry, and some analysts believe it can one day overtake traditional tobacco sales, but CVS has turned the market over to the competition.

For all the losses it was willing to accept, CVS hoped that it could win more business from hospitals and insurance companies as a result of its stance. If the company can be seen as helping to make their patients healthier, it just might gain something from the halo effect of its actions. So far, though, that hasn't panned out.

Management said in the latest earnings call that it can't pinpoint any one win for pharmacy benefits management that it could tie to the tobacco ban. Sure, it's still early yet and that win could still come, but this potential tangible benefit to the ban hasn't materialized. Investors need to hope that this branding effort around public health ultimately helps the business overcome these more tangible headwinds.

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  • Report this Comment On August 17, 2014, at 4:20 PM, DrP79 wrote:

    CVS estimated a loss of 2% from not selling tobacco products.

    Yet I think they underestimated the effects of folks coming in to buy that and then buying OTHER products, not to mention what is said to how much they valued that potential customer.

  • Report this Comment On August 17, 2014, at 10:11 PM, statusQuo wrote:

    DrP79 is Right. My local CVS still sells cigarettes, but I didn't know about their hostilities towards their smoking customers. But I should have when the manager refused to accept an official MFG coupon for Winstons, claiming that "it was counterfeit". I received that coupon in the mail direct from RJ Reynolds. By that time they didn't even sell standard ashtrays anymore.

    Let's just say that I used to buy my cigs and shop for other products at CVS.

    That CVS is in a plaza with a 99 Cent Only Store right next door and a Ralph's market. The 99 Cents Only Store sells rubbing alcohol, hydrogen peroxide, and other common drugstore items for that same low price.

    Thank you for the news about Dollar General.

    I think they and Walmart are the only stores that still cater to us Boomers. The other stores including the Kroger chains seem to be in business to deprive the traditional products that we grew up on.

    Hint: It is Big Tobacco that is demonizing cigarettes and ordering government to assault their customers in order to max their pricing and taxes in an era of declining tobacco use.

    I would fire every one of them and find a better supplier.

  • Report this Comment On August 17, 2014, at 10:35 PM, statusQuo wrote:

    I forgot. I've bought cigarettes at other CVS locations back in 2010 when the FDA started interfering with our Right to Smoke, and so I took note of the customers ahead of me and what they bought. In these locations, three out of every five customers were there to buy a pack or a carton.

    They were often sold out of my brand.

    I predict that there will be some downsizing of CVS, ala Radio Shack.

    For more than 50 years, The American Cancer Society has always claimed a 1 in 5 Risk of cancer from smoking. That means that four out of five smokers do not risk cancer. A risk figure is higher than The Probability Rate.

    I am guessing that those of us with a family history and a risk of cancer also suffer from a natural aversion to smoking, and this is because the antismokers always complain about how much a good cigarette really stinks to them. Of course since the FDA messed them up, none of them are as good as they should be anymore. I miss the good ones.

    My guess is also due to the fact that nearly 4,000 teens try tobacco every year, but only a third of them continue to use it. So much for claims of "being addictive".

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