Pharmacy retail giant CVS Health (NYSE:CVS) released its fourth-quarter financial results before the market opened on Tuesday morning. With a very busy 2015 behind it, CEO Larry Merlo had guided that the company was poised for "significant growth" during the period.
Did the actual results live up to management's rosy expectations?
CVS Health: The raw numbers
|Q4 2015||Q4 2014||Change %|
|Revenue||$41.1 billion||$37.1 billion||11%|
|Adjusted Net Income||$1.7 billion||$1.4 billion||21%|
Total revenue grew by a strong 11% when compared to the year ago period. The growth was driven by a combination of acquisitions and an uptick in pharmacy network claims.
Adjusted earnings per share of $1.53 were right in the middle of management's previous guidance, and up 26.5% versus the same time a year ago. That's a huge jump, especially for a $100 billion market cap giant.
Beyond the numbers
Headline numbers came in within management's previously communicated expectations, but let's go beyond the numbers to see how the company performed in the three areas that I previously suggested that investors pay attention to:
1. Was the Target deal a bulls-eye?
Last year CVS Health spent $1.9 billion to take over Target's (NYSE:TGT) pharmacy and clinic business. The deal closed in December, and management expects to have the roughly 1,700 Target pharmacies rebranded to the CVS name by the end of the summer. Management has already successfully converted a handful of Target pharmacies over to the new "store within a store" format, and will ramp up its efforts significantly in the coming few months.
As the remodels are completed, CVS will then focus its attention on converting current Target customers that do not already use the store's pharmacy services.
CEO Merlo explained:
Now as we complete each store conversion and its rebranded as CVS Pharmacy, at that point we launch our additional core offerings, core pharmacy offerings, to include Specialty Connect, Extra Care Pharmacy Rewards, along with our digital tolls and that's in addition to Maintenance Choice that was available upon the transaction close. We'll begin adding marketing elements as geographies convert, all with the goal of converting Target guests who currently don't use the pharmacy.
2. How are legacy stores performing?
CVS Health had a solid performance with its existing store base. Same store sales increased 3.5% over the prior year period, which compares favorably to the 1.7% growth that it showed last quarter.
That growth primarily came from the back of the store, as pharmacy same store sales grew 5% during the period, which included a 4.7% negative hit due to generic drug introductions. The front of the store didn't hold up as well. Sales were down 0.5%, mostly due to lower traffic. CVS estimates that its total retail market share grew to 21.8% during the quarter, which was a 65 basis point bump over the year ago period.
The company continues to grow out its clinic business as well -- it now operates 1,135 clinics in 33 states. During the quarter, it opened 36 new MinuteClinics and added another 79 as part of the Target acquisition.
On the downside, the company is no longer confident that it will be able to reach its goal of having 1,500 clinics up and running by 2017. CEO Merlo stated:
I think with the acquisitions, we may not hit that number by 2017. Obviously, we're going to be focusing on the Target integration, which includes about 80 clinics this year, so we may be a year or two behind that original target of 2017, but we continue to be comfortable with the rollout.
3. How's the Pharmacy Benefit Management business performing?
Revenue from the PBM side of the business was up 11.1% versus the same quarter a year ago to $26.5 billion. That growth was driven primarily from its $12.9 billion acquisition of Omnicare, as well as from a 6.4% growth in claims. CVS Health added $1.2 billion in new net business during the quarter, which brings the total for 2014 to $12.7 billion. Importantly, CVS boasted a retention rate of 98% for the year.
PBM gross margins came in at 5.6%, up 45 basis points when compared to the same period last year.
CVS believes that its adjusted EPS will land between $1.14 and $1.17, which is roughly flat with the same period last year. However, the picture looks much brighter for the full year. Management believes it will be able to grow its top line by more than 17%. They are forecasting that adjusted earnings per share will land between $5.73 to $5.88, representing growth of at least 11% on the bottom line, which includes an estimated $4 billion in share repurchase activity.