Dive Brief:

• Shares of CVS Health fell some 11.3% in premarket trading Tuesday on news that the drugstore retailer missed revenue projections from analysts and lowered its guidance for the full fiscal year, citing slowing prescription growth as well as the loss of contracts to rivals.

• CVS Health reported third quarter net income of $1.54 billion, or $1.43 per share, up from $1.25 billion or $1.10 per share for the same period in 2015, while revenue climbed to $44.6 billion, an increase from the $38.6 billion in the same period last year but missing FactSet expectations for $45.3 billion. 

• Q3 same-store sales rose 2.3% and pharmacy same-store sales increased 3.4%, muted by introductions of lower-priced generic drugs, the company said.

Dive Insight:

Days after CVS Health announced it will eliminate 600 jobs at its corporate offices in Rhode Island, Illinois and Arizona over the next two months, the company slashed its guidance for the fiscal year ahead, blaming pharmacy network changes that will likely move some prescriptions away from its stores as well as dwindling subscription growth. For 2017, CVS expects diluted EPS in the range of $5.16 to $5.33 and adjusted EPS in the range of $5.77 to $5.93, which includes the impact from the projected loss of more than 40 million retail prescriptions related to marketplace changes like new retail pharmacy networks that are excluding CVS. 

An uptick in lower-priced generic pharmacy sales and declining store traffic also muted CVS Health this quarter, as it did in its previous quarter. President and CEO Larry Merlo called the retailer's results "solid," but that network changes are hitting its pharmacy operations pretty hard.

“We are currently experiencing slowing prescription growth in the overall market as well as a soft seasonal business," Merlo said in a statement. "These factors combined are leading us to reduce the mid-point of our guidance for this year by five cents per share. The network changes have more significant implications for our 2017 outlook. While we expect a healthy increase in [pharmacy benefit management] operating profit growth in 2017, we expect a decrease in retail operating profit growth.” 

Retail analyst Neil Saunders, CEO of Conlumino, said that while CVS “remains a robust and impressive firm” and its third-quarter performance was “admirable,” it will likely to continue to have trouble competing with its primary rival, Walgreens.

“[T]he retail side of the business remains stuck in a rut,” Saunders wrote in a note emailed to Retail Dive. “While the comparable sales lift of 2.3% for retail pharmacy as a whole is not too bad, all of this comes from pharmacy-related sales. Front of store revenues declined by 1% on a comparable basis, a better position than last quarter’s 2.5% decline but far from a good result considering they come off the back of a 5.8% drop in the prior year.”

While the Affordable Care Act has expanded some opportunities for drugstore retailers to offer more medical services, the law has also helped lower some healthcare costs (as it was intended to do), which could hit retail sales. CVS also left a lot of money on the table when it ceased sales of tobacco products two years ago, in part to rationalize its healthcare focus with its retail sales. Saunders hailed CVS’s emphasis on its healthcare business but said “we do not see why CVS cannot augment that progress with better numbers from its retail division.”

CVS also must pay increased attention to customer service, especially over the holidays, according to Saunders. 

“Our own customer data shows a continued dropping off of satisfaction with the CVS in-store experience, something that could ultimately have a knock-on effect to pharmacy sales and to the success of other parts of the business,” Saunders said. “It also does not bode well for the upcoming holiday season where beauty is, once again, set to be a key gifting category.”