The soon-to-be leader of the drugstore market had a spectacular first quarter as a result of improved sales and margins. CVS (NYSE:CVS) announced a 24.6% increase in earnings to $244.6 million for the first quarter.

CVS doesn't appear to be showing any signs of slowing down either, as the company continues to expand its business in both traditional and creative ways. It expects to finalize its acquisition of 1,260 Eckerd drug stores (currently owned by J.C. Penney (NYSE:JCP)) next month. If approved (I see no reason why it won't get approved), the company would surpass Walgreen (NYSE:WAG) as the No. 1 drugstore chain, with approximately 5,400 locations.

The company also made camera phone photo printing available in all CVS stores with one-hour photo services. CVS became the first national retailer to provide this option. The company expects this service to bring in new customers to its stores as it did with digital photo customers (13% of the company's digital photo customers were new to CVS). Camera phone sales are expected to increase from 7.5 million to 21.3 million by the end of the year, according to figures quoted by the company.

The company also released its statement of cash flows this morning, which Fools mightily appreciate. It produced $126.6 million in free cash flow for the quarter, substantially ahead of last year's $7.6 million.

In addition to the remarkable earnings and free cash flow growth, CVS reported an increase in same-store sales of 6.4%, while total revenues rose 8% to $6.82 billion. The company's gross margins expanded impressively to 26% from 25%

With this type of performance, one might expect the stock to come at an outrageous price. Well, with CVS, that's not the case. Though it's trading near its 52-week high and may cross it today, it's still a relative value at just under $40. Its forward P/E of 19.3 compares very favorably to competitor Walgreen, which is trading at 26.9 times forward earnings. I may not have paid much attention to it in the past, but I'm certainly going to keep an eye on CVS in the future.

What's your opinion on CVS? Did it do the smart thing by buying Eckerd? Will you go get your camera phone pics developed there? Talk about it on the CVS discussion board.

Fool contributor Mike Cianciolo welcomes feedback and doesn't own any of the companies mentioned in this article.