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Image source: CVS Health.

Pharmacy retail giant CVS Health (NYSE: CVS) reported its second-quarter results on Tuesday, Aug. 2. Let's dig in to the company's results to see how the company performed in the five areas that I suggested investors pay attention to.

CVS Health Q2: The raw results

MetricQ2 2016Q2 2015Change
Revenue $43.7 billion $37.2 billion 17.6%
EPS  $0.86 $1.12 (27.4%)
Adjusted EPS $1.32 $1.22 8.3%

SOURCE: CVS HEALTH. 

Revenue this quarter came in at $43.7 billion, up 17.6% year over year. That strong gain was driven primarily by last year's two major acquisitions (Target's pharmacies and clinics and Omnicare), but it was slightly behind the 18.5% growth rate management had predicted.

While the top line jumped forward at a healthy rate, CVS Health saw a big decline in its EPS this quarter, primarily because of a $542 million charge it recorded as a result of extinguishing a big slug of debt. In addition, CVS saw a big increase in interest expense and more one-time acquisition costs. If you adjust for those items, EPS actually rose by 8.3% to $1.32, slightly ahead of management's guidance range of $1.28 to $1.31.

CVS Health also had another active quarter on the buyback front. Management bought back 18.5 million shares for $1.9 billion during the period, which has exhausted its full-year buyback plan.

Margins continue to slide

Margin erosion continues to create a wide gap between CVS Health's revenue growth rate and its adjusted earnings-per-share growth rate. Consolidated gross margin came in at 16.1% this quarter, down 115 basis points over the year-ago period. That showing caused the company's operating margin to fall to 5.6%, a decline of 60 basis points.
 
Management continued to call out one-time expenses from the Omnicare and Target pharmacy acquisitions as creating margin headwinds, but they also noted continued pressure on pricing.

The pharmacy benefits management (PBM) business is growing fast

CVS Health continues to show strong growth in its PBM business, which acts at the middle-man between payers and drugmakers. Revenue for this division came in at $29.5 billion for the quarter, up a strong 20.7% over the year-ago period. Management credited the growth to 23% growth in claims, as well as strong growth in its specialty pharmacy division.

Net new business this quarter came in at $4.6 billion, and management stated that 75% of renewals for 2017 have been completed. CVS Health continues to boast a stellar retention rate, coming in this quarter at 97.5%.

"With our differentiated value proposition, we see 2017 shaping up to be another very successful PBM selling season, with substantial gross and net new business to date," said Larry Merlo, CVS Health's CEO.

Same-store sales slip

Revenue growth in its retail/LTC (long-term care) segment was a strong $20 billion, a 16% year-over-year improvement. However, the majority of the gains were driven by last year's acquisitions of Omnicare and Target's pharmacy and clinic business.
Minuteclinic Image

Image source: CVS Health.

 
Companywide same-store sales growth this quarter was 2.1%, down slightly from last quarter's 4.2% gain. However, last quarter's result included an extra day thanks to leap year, so the results are much more consistent when you control for that change.
 
Pharmacy same-store sales grew by 3.9%, which was an impressive result considering that CVS Health faced a 355-basis-point headwind from generic-drug introductions. However, the front of the store didn't do quite as well, as same-store sales decreased 2.5% this quarter from lower traffic and the impact of the Easter shift.

The conversion is complete

CVS Health said all 1,667 Target pharmacies and 79 clinics have officially been converted to CVS Health's branding, slightly ahead of its previously announced schedule. From here, management plans on ramping up its spending on marketing efforts to drive consumer awareness and utilization of these stores, believing that these efforts will allow it to win new customers and capture additional market share.

Looking ahead

Management expects the good times to roll into the third quarter. CVS is guiding for revenue growth of at least 16.5% and for adjusted EPS to be between $1.55 and $1.58. That represents growth of at least 21%.

The strong results from the first half of the year, mixed with the upbeat third-quarter guidance, have CEO Merlo feeling good about the company's full-year prospects: "Given our outperformance in the second quarter and confidence in our expectations for the back half of this year, we are raising and narrowing our adjusted EPS guidance and also raising our free cash flow guidance for 2016."

CVS Health now expects full-year adjusted EPS to land between $5.81 and $5.89, up slightly from its prior outlook of $5.73 to $5.88. 

In all, CVS Health had a solid quarter and once again proved that its long-term growth story is still intact.

 

Brian Feroldi has no position in any stocks mentioned. The Motley Fool recommends CVS Health. 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.