CVS Caremark Corporation Earnings: Will Growth Crush Rival Rite Aid?

On Friday, CVS Caremark (CVS -0.49%) will release its quarterly report, and investors have been impressed by the drugstore chain's ability to outpace competitors Walgreen (WBA 0.57%) and Rite Aid (RAD 10.19%) with its past growth in sales and net income. Yet as Rite Aid has recovered and Walgreen attempts to accelerate its growth, CVS Caremark needs to take care not to squander its competitive advantages and continue moving toward dominating the drugstore-retail industry.

CVS has come a long way in a short period of time, having gone beyond its initial simple drugstore business model to incorporate the Caremark pharmacy-benefits management business. Doing so helped create a vertically integrated behemoth with considerable advantages over Rite Aid and Walgreen because of the potential for capturing additional retail business via cross-selling. But CVS Caremark's recent decision to stop selling tobacco has raised concerns about growth going forward. Let's take an early look at what's been happening with CVS Caremark over the past quarter and what we're likely to see in its report.

Source: CVS Caremark.

Stats on CVS Caremark

Source: Yahoo! Finance.

Will CVS earnings keep climbing higher this quarter?
In recent months, analysts have had mixed views on CVS earnings, raising their first-quarter estimates by $0.06 per share but cutting their full-year 2015 projections slightly. The stock has kept performing well, though, climbing 8% since late January.

CVS Caremark's fourth-quarter earnings report helped boost investor confidence in the drugstore chain, with profits rising 12% on a 4.6% sales increase from the year-ago quarter. Pharmacy same-store prescription volume rose 3.8%, and cost inflation drove revenue for the segment up 5.2%. CVS also raised its earnings guidance for the first quarter by 5% to 8%, and it foresaw strength throughout 2014 in its financial results.

Source: hattiesburgmemory via Wikimedia Commons.

But drawing much more interest from investors was CVS Caremark's decision to stop selling tobacco products in its stores by this October. Although tobacco is a lucrative product for CVS, the company said that in its efforts to promote health and reduce disease, stopping tobacco sales will make tobacco-related illnesses less common. Some believe that CVS Caremark might be able to benefit from new agreements with health-care providers to provide patient services as a result of the move. So far, Rite Aid, Walgreen, and other prescription providers haven't followed suit, which could give CVS an additional reputational boost as the first mover on the issue.

Still, CVS can't afford to ignore its competitors. Rite Aid has made an impressive comeback, as its most recent earnings came in well above forecasts. Rite Aid enjoyed a 2.1% jump in comps, with pharmacy gains of 3.5% driving the overall growth. Rite Aid still trails CVS by a wide margin in many key business metrics, but Rite Aid's revival from what many thought would be certain failure means that CVS can't afford to concentrate only on Walgreen in considering its future moves. Moreover, with Rite Aid having bought RediClinic to boost its presence in the retail mini-clinic arena, CVS Caremark will face competition in that growing niche as well, especially if Rite Aid's store remodeling efforts bring in more customers.

In the CVS earnings report, watch to see how the company compares to Rite Aid's recent results, both in pharmacy sales and in front-of-store results. Moreover, take a close look at the pharmacy-benefits side of CVS Caremark's business. If PBM goes well, it could provide the growth that could crush Rite Aid's recovery.

Click here to add CVS Caremark to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.