Dive Brief:

• CVS Health Corp. on Tuesday reported first quarter net revenues rose 3% (or $1.3 billion) to $44.5 billion, up from $43.2 billion in year-ago period, besting analyst expectations for $44.20 billion, according to Thomson Reuters I/B/E/S data cited by Reuters. 

• Q1 front store same-store sales declined 4.9% in part because there was no leap day this year, (amounting to a 100 basis point hit) while the fact that Easter will fall in Q2 added another 75 basis point negative impact compared to the previous year. Front-store sales were also hurt by softer customer traffic and the retailer’s efforts to rationalize its pricing strategies, partially offset by larger basket size.

• Q1 net income fell 16.9%, to $953 million or 92 cents per share, down from $1.04 per share in 2016, due to an 18% decline in operating profit (in part due to store closures), partially offset by lower interest expense thanks to earlier refinancing of debt. Analysts on average had forecast earnings of $1.10 per share, according to Thomson Reuters I/B/E/S data cited by Reuters. 

Dive Insight:

In his statement on Tuesday, CVS president/ CEO Larry Merlo called the current year a “rebuilding year” for the company and one that is “off to a solid start.”

“However, while we are pleased with our financial performance versus our expectations, we won’t be satisfied until the company returns to sustainable, healthy earnings growth,” he said. “We fully intend to return to healthy levels of growth. We remain confident in our model as well as our position in the evolving health care landscape, and our ability to generate significant levels of cash will continue to play an important role in driving shareholder value over the longer term.” 

Like Merlo, GlobalData Retail analyst Håkon Helgesen said that because the pressures on the drugstore retailer are “permanent rather than transitory,” this year will likely shape up as one of rebuilding rather than advancement. At the moment, those efforts aren’t helped much by the company’s front-of-the-store retail side. Helgesen suggested that the company only has itself to blame, having ignored that side of its business — neglecting stores, merchandising and other retail opportunities. But the retail side holds promise for the company, he said.

“The result is that CVS has a retail business that is below par which, in the present competitive environment, is a significant disadvantage,” Helgesen said Tuesday in an email to Retail Dive. “From our data, it is clear that CVS is losing share in high growth areas like health and wellness and beauty.”

The rebuilding that will happen this year should include attention to the retail business because there’s opportunity there, to offset softening in the pharmacy and healthcare side of the business, he said. And there are signs that CVS is taking some of the right steps. Its new store format unveiled last month “is much lighter and brighter and makes the shopping process easier through the introduction of more signage and information,” Helgesen said, noting that the retailer’s beauty selection expansion (including more upscale brands), new health and wellness product selection and its focus on healthy snacks could attract shoppers, including younger ones.

“[T]his is a step in the right direction — even if it is one that is long overdue,” Helgesen wrote. “However, major changes will be rolled out to only 70 locations this year, which means the impact will be negligible. It will not be before 2018, when the changes are rolled out to hundreds of stores, that a fuller impact on the sales line will be appreciated.”