CVS Caremark and the Snickers Factor

The soft economy has hit some retail sectors hard. But there are still pockets of life, and CVS Caremark (NYSE: CVS  ) is one of the companies leading the way. One reason is what you could call the "Snickers Factor."

Chief Financial Officer David Rickard noted on the conference call that consumers may be hesitating to buy large-ticket discretionary items, but small-ticket items like Snickers bars still are finding their way into shopping baskets. Of course, front-end (retail) items only make up about 15% of revenue for CVS, but they are an important driver of transaction size and overall profitability. 

Total revenue for the first quarter grew 62%, to $21.3 billion. Keep in mind, however, that the Caremark segment was part of CVS for only a small portion of last year's first quarter. Retail comp sales continued to steam ahead at 3.9% -- noticeably slower than the torrid 7.5% comps in last year's first quarter, but still strong. Front-end comps were slightly stronger than the prescription business.

Pharmacy benefit management (PBM) revenue grew 2.3% on a full-quarter basis -- as if Caremark had been part of CVS for the full quarter last year. About one-third of these contracts come up for renewal each year, and CVS is pleased with the renewal rates it is seeing so far, including some important core accounts like AT&T (NYSE: T  ) and 3M (NYSE: MMM  ) .

Earnings per share of $0.51 were 18.6% above last year, as acquisition-related expense synergies more than offset higher interest expense and a larger share base resulting from the acquisition of Caremark.

Management is also touting its success with in-store MinuteClinics, serving 300,000 customers this past quarter. At 510 clinics in operation, that works out to 6.5 customers a day, which doesn't sound like droves to me. But CVS has a significant "first mover" advantage over Wal-Mart (NYSE: WMT  ) and Walgreen (NYSE: WAG  ) in this new venture. Management has decided to slow the growth of new clinics for the balance of 2008, to focus on expanding services and contracting with more third parties.

Overall, I continue to see CVS as one of the best-positioned retail growth companies. Selling at 21 times its trailing earnings, the stock is priced at a premium compared to the rest of the field. So Foolish investors looking for a bargain in retail stocks have no shortage of (seemingly) more attractive choices. But CVS looks like a solid choice to me at this point.

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