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CVS Plans to Kick the Habit

By Kyle Colona – Feb 7, 2014 at 3:00PM

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CVS Caremark announced the company intends to phase out cigarette sales by Oct. 1. This move is in-line with the company’s changing business model.

CVS Caremark's (CVS 0.47%) announcement that the company will stop selling tobacco products by Oct. 1 dovetails with the company's planned expansion of its MinuteClinic locations. CVS Caremark is the first national pharmacy to quit tobacco sales -- and it is likely other retail pharmacies with mini-clinic services will follow suit.

A snapshot of CVS
CVS Caremark's move makes complete sense as the company morphs into a health-care provider with its MinuteClinic services.

CVS Caremark is historically strong in many ways. The company is a sector leader in generic-drug sales, and overall pharmaceutical sales drive the retailer's profits. CVS Caremark also offers pharmacy benefit-management services, Medicare Part D assistance, and discounted drug-purchase agreements with various employers and corporations.

These services helped the retail chain to post a solid third quarter in 2013 where earnings rose 25% on solid revenue growth in its pharmacy-services business. Net revenue increased $1.4 billion, or 7.8%, to $19.5 billion in the three months ended Sept. 30. Finally, CVS raised its per-share earnings estimate for the year from $3.94 to $3.97.

Why it matters
As has been reported, CVS Caremark intends to expand its MinuteClinic services. According to the company's website, MinuteClinic has more than 800 locations in 28 states and the District of Columbia. Some of the services provided by nurse practitioners and physicians include vaccinations for flu, pneumonia, and hepatitis, offering routine lab tests as well as an array of wellness services including its "Start to Stop" smoking cessation program.

So, with a smoking-cessation program already being offered, it would be counterintuitive for CVS Caremark to continue selling tobacco products. In fact, Larry J. Merlo, president and CEO of CVS Caremark, said in a statement that ending cigarette sales and other tobacco products "is the right thing to do" for the company as it aims to help people "on their path to better health."

"Put simply, the sale of tobacco products is inconsistent with our purpose," said Merlo.

A robust national cessation program
CVS Caremark also intends to launch what it calls a robust smoking-cessation plan across the nation this spring. The program will include information and treatment on smoking cessation at its retail outlets and MinuteClinic locations as well as online. The program will also be offered to its pharmacy benefit- management plan members.

The company anticipates it will cost about $2 billion in annual revenue, or $0.17 per share, which equates to an impact on earnings of about $0.06 to $0.09 per share. These nickel and dime losses will be offset by "incremental opportunities" that position CVS Caremark for continued long-term growth.

In other words, CVS Caremark believes expanding it MinuteClinic and the range of services available will make up for revenue losses. The company's acquisition of Coram Infusion last December as well as the strategic alliance with Cardinal Health to produce and distribute a broader array of generic drugs are some of the "incremental opportunities" mentioned in the press release.

Other Foolish thoughts
Meanwhile people who choose to continue puffing will have to shop elsewhere. In particular, they can still by their smokes at convenience stores as well as dollar stores. As for the latter, one potential "winner" of CVS Caremark's exit from tobacco sales will be Dollar General (DG -0.10%).

The discount chain started selling cigarettes for the first time in 2013. The company believes doing so has supported overall sales. And this could be the case, as Dollar General's fiscal third-quarter profit rose 14%. The profit rise was attributed to increased foot traffic and shoppers spending more with each cigarette run.

In fact, comparable same-store sales were up 4.4%. Dollar General customers purchasing other consumables besides smokes grew by 44%. In its earnings call last December, CEO and chairman Rick Drelling said, "[W]e're beginning to convert the cigarette shopper into a shopper."

The last puff
In sum, CVS Caremark's plan to kick the tobacco habit is yet another good move that ultimately makes CVS Caremark a good choice for investors with a long-term view.

This is also good news for CVS Caremark customers who are also trying to quit smoking. Now, instead of buying smokes, they can take advantage of the cessation program currently being offered at MinuteClinic locations. And expanding the MinuteClinics makes kicking the tobacco habit a smart choice for CVS Caremark and smokers too.

Investors will learn more on Feb. 11 when the company will release fourth-quarter and year-end results.

Kyle Colona has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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