Strong CVS pharmacy results belie retail weakness

Dive Brief:

Drugstore retailer CVS Health on Thursday reported a fourth quarter net revenue increase of 11.7% to $46.0 billion, up from $41.1 billion in the year-ago quarter but shy of Thomson Reuters I/B/E/S estimates for $46.50 billion.
Q4 revenue in CVS's retail/long-term care pharmacy increased 4.7% to $20.8 billion, largely driven by the addition of Target pharmacies acquired in December 2015, the company said. Q4 pharmacy same-store prescription volumes rose 2.0% on a 30-day equivalent basis, and Q4 same store sales decreased 0.7%, with pharmacy same store rising 0.2% but front store same-store sales falling 2.9% on softer customer traffic and efforts to rationalize promotional strategies (partially offset by an increase in basket size).
Pharmacy same-store sales were weakened by approximately 380 basis points due to recent generic introductions, CVS added.

Dive Insight:

At CVS's investor conference at the end of last year, executives often sounded more like they were talking about a healthcare business than a retail one — and that’s proving to be a weakness.

At that December conference, CVS President and CEO Larry Merlo did say that retail presents one of the company’s biggest advantages, considering its healthcare operations are under pressure in a volatile market environment. But GlobalData Retail managing director Neil Saunders maintains CVS isn’t following through on that realization, saying on Thursday that his firm's analysts were “surprised at the complete lack of evolution in the format and the paucity of innovation” in some CVS stores.

“An attempt to dial back on front of store promotions and difficulties in driving traffic to shops diluted sales on the pure retail side,” Saunders said in a note emailed to Retail Dive. “However, in our view, these factors are simply part of the wider malaise in CVS’s store-based business. We have, for a long while, been critical of CVS’s lack of thinking in retail — an opinion that remains largely unchanged.”

CVS on Thursday kept the focus on its strengths, including its cash flow and its pharmacy benefit management operations, noting that full fiscal year net revenues increased 15.8% to $177.5 billion and adjusted earnings rose 13.2% to $5.84 per share, just shy of the Thomson Reuters I/B/E/S estimate of $5.86 per share. CVS also confirmed guidance for its fiscal 2017 (expecting adjusted earnings to land between $5.77 per share to $5.93 per share) and its first quarter (expecting adjusted earnings of between $1.07 per share to $1.13 per share).

But Saunders warns that CVS will fall behind rivals that are beefing up their retail operations.

“[We] applaud CVS for its strength and innovation on the healthcare side of its business,” Saunders said. “However, we see no reason why this progressive attitude cannot be applied to the retail side. This is especially so when retail — where gross margins are 29.6% — is a far more profitable part of the business than pharmacy services, where gross margins languish at around 5.2%. Unfortunately, CVS has entirely the wrong attitude to retail — the role of which, it has stated, is to support the pharmacy division. This is certainly a function, but the company should see retail as a business in its own right. Until it does, it will remain under potential.”