CVS Caremark (NYSE:CVS) has announced that all of its stores will stop selling cigarettes by October. The company claimed the move would help improve the chain's health-oriented pharmacy focus. CVS is the second-largest drugstore chain in the country and the move could put pressure on leader Walgreen to follow suit. However, other stores stand to gain customers looking for cheap packs of smokes. Family Dollar (NYSE: FDO) and Dollar General (NYSE:DG) could benefit the most.
President Obama and the Center for Disease Control and Prevention praised CVS' decision from a public health standpoint. From a business standpoint, the company expects to shave $2 billion in sales and $0.06-$0.09 per share in profit from its annual results by pitching cigarettes, according to Reuters. CVS brought in sales of over $34 billion in 2012.
According to the CDC, over 18% of U.S. adults were smokers in 2012, which means that CVS removing stock from shelves isn't going to end the smoking epidemic.
The tobacco industry will carry on at many retailers, including Wal-Mart. However, the potential for increased tobacco sales at the discount stores comes at an interesting time.
Discount stores thrive on consumables
Dollar General and Family Dollar both benefited during the recession as customers found even Wal-Mart's prices too expensive. However, customers have since trickled back to Wal-Mart as the economy improves and the super-center slashes prices lower. Discount stores faced slowing sales across all segments -- except consumables, which now account for more than three-quarters of overall revenue at both stores. Since 2012, those consumables have included tobacco. Family Dollar and Dollar General have specifically mentioned tobacco when discussing strong-selling products.
Family Dollar's first quarter report last month featured positive growth in only two segments: seasonal and electronics crept up 1.2% year-over-year, and consumables sales jumped nearly 5%. The growth resulted in consumables accounting for 75% of overall revenue.
Dollar General had a better showing in its third-quarter report in December, which included growth across all segments. Consumables still led the pack with nearly 12% growth and accounted for 77% of revenue.
Why the discount stores?
Gas stations tend to charge more for tobacco than general retailers. And there's a chance that Walgreen and Rite-Aid will follow CVS' lead at some point in the future so those stores don't become known as the drugstores that still sells tobacco.. Wal-Mart has so many irons in the fire that gaining tobacco customers will have as much revenue impact for the company as CVS will see from losing those customers. However, the discount stores are well-positioned to benefit from the displaced customers.
Family Dollar had over 8,000 stores across 46 states at the end of the first quarter. Dollar General has over 11,000 stores across 40 states. Compare that to CVS with about 7,600 stores in 45 states, which means there's a similar geographic reach between the three stores.
However, the discount stores also cater to lower-income customers, which matters because people living below the poverty line are more likely to smoke. According to the CDC, nearly 28% of people below the poverty line were smokers in 2012, compared to 17% of those at or above the line.
Foolish final thoughts
CVS won't suffer from the loss of tobacco sales and the public health benefit falls in-line with the company's focus. Expect to see the other drugstores follow the leader in the coming months. Also check out the earnings reports of Family Dollar and Dollar General in the early part of next year and see if those consumables segments manage even higher growth rates.