For most of us, a good flu season means one thing: We didn't get it. No aches, pains, fever, nausea... you get the picture. But the major drugstore chains look at the flu season from a different perspective: More influenza going around is enough to make them positively bound out of bed and dance a jig.
CVS (NYSE:CVS) reported first-quarter earnings last Thursday, and because of a heavy flu season, the results brought smiles all around. Comparable sales were up 8.2%, driven by strong 8.8% growth in the same-store prescription business. Front-end comps -- sales of things like toiletries and other items sold in the front of the store -- were 6.9%, which isn't so shabby either. The Easter holiday falling earlier was also a benefit, adding nearly a half-point to quarterly comps, according to company estimates.
Earnings per share grew 16.9% to $0.69 for the first quarter, beating Thomson First Call estimates of $0.68. Margins held steady at 25.9% of sales. Operating expenses were up by nearly a half a point as the company continues to digest the acquisition of Eckerd stores from J.C. Penney (NYSE:JCP) last fall.
Walgreen (NYSE:WAG) also reported a double-digit quarterly increase in EPS, although the market gave its numbers a decidedly cool reception. Rite Aid (NYSE:RAD) beat analyst expectations for the quarter and may be starting to show some of the right stuff.
The integration news on the Eckerd acquisition is also promising. CVS has put its pricing and merchandise mix into all the acquired stores, and has completed remodeling about half the stores, with the rest scheduled for the second half of this year. The remodels began in Florida, where the stores are now experiencing positive comparable sales gains in the double digits. When the chain was acquired last fall, Eckerd sales were in a steep decline. Remodels of acquired stores in Texas were completed in March, and the company says it's too soon to gauge the sales impact, although it expects sales increases to be similar to those of the Florida stores.
I am very impressed with the workmanlike approach CVS has taken toward the Eckerd acquisition. It bought 1,268 stores and will close 174 by the end of this year, which means 86% of the acquired stores are in non-competing locations with the base chain. Completing the integration within about 16 months would be a nifty feat. CVS expects its comparable sales to accelerate starting in August, when the Eckerd stores join the comparable store base. The company says that purchasing and expense synergies from the acquisition are on track.
The three drugstore chains also just reported sales results for April. CVS and Walgreen both posted solid comparable sales increases of just over 5%; Rite Aid fared much worse at negative 2%. It's not hard to understand why CVS and Walgreen are trading at a premium.
I like the outlook for CVS. With new-store growth adding 3% to 4% to square footage each year, and comparable sales in the mid- to upper-single digits, we should expect revenue growth to level off around 10%, with strong double-digit earnings growth likely for 2005 and beyond as acquisition synergies continue. The company reiterated its 2005 earnings guidance of 24% to 26% growth during the earnings conference call. That's nothing to sneeze about.
Additional prescription perspectives can be found at:
- Herbs May Hurt You or Your Portfolio
- Walgreen's Wonderful Comps
- CVS's Shot in the Arm
- Rite Aid Still Needs First Aid
Fool contributor Timothy M. Otte lives in Atlanta and welcomes comments on his articles. He doesn't own shares in any of the companies mentioned in this article.
