Analysis: CVS still lacking a good beauty proposition
Overall, CVS has kicked off its new fiscal year with a good set of numbers. Although net revenue is up by a below-trend 2.6%, operating profit increased by 8.5%. The bottom line number was aided by both a decrease in store rationalization costs and gross margin improvements in retail pharmacy.
The more sluggish growth in net revenue was mostly down to a weaker uplift in the pharmacy services division where generic dispensing and price deflation both continue to bite into sales. Fortunately, volumes are holding up well and we are confident that this part of the business will remain a powerhouse for CVS going forward.
The retail segment put in a solid performance, with sales rising by an above average 5.6% on a total basis and 5.8% in same-store terms. This is a good outcome, especially since, just as in the pharmacy services division, lower-priced generic drugs have exerted downward pressure on the top-line.
For once, CVS also has better news on the retail side where front of store comparable sales increased by 1.6%. While this break in the tradition of reporting negative numbers is to be celebrated, the growth does come with some caveats attached.
The first of these is the incredibly soft comparative from the prior year when front of store comparables fell by 4.9% thanks to a reduction of promotions and on less trading day. This obviously makes growth easier to attain this time around. It also highlights the fact that over a two-year period, CVS has still lost significant ground in retail.
The second point to note is the shift in the timing of Easter which, this year, fell into the first quarter. This contributed around 0.9 percentage points to growth which means, on an underlying basis, sales increased by a less robust 0.7%. On top of this, a particularly bad cold and flu season also boosted sales to the tune of 0.7 percentage points. When this is also accounted for, front of store comparables were actually flat over the prior year.
Such a dissection of the numbers may seem unfair; after all, CVS did generate growth no matter where this growth came from. However, a forensic examination is important as it underscores that the true retail part of CVS isn't delivering. As we have noted many times before, this is a major lost opportunity and one that CVS should remedy. Sadly, we see little sign of this happening and the retail offer remains down-at-heel and dingy, with no flair or imagination.
That noted, CVS does seem to be making some efforts in marketing. Its Beauty in Real Life campaign -- which features untouched and unaltered photos of women wearing cosmetics -- has been launched. We applaud this initiative which is in line with the values of modern consumers, particularly younger ones.
Unfortunately, campaigns for beauty products can only ever be truly effective if they are backed by a good beauty proposition. This, in our view, is still lacking. The irony of putting out marketing about feeling beautiful and then presenting the customer with a jumbled assortment of cosmetics in a sterile carpet-tiled store illuminated by yellow-tinged light from aging fluorescent bulbs seems to be lost on CVS.
Once again, the bottom line conclusion is that CVS needs to make more effort with retail. This is not just to make up ground in sales terms, it is also because CVS wants to increase its influence in health services. That requires good retail disciplines and will necessitate CVS to rethink the way it presents itself to shoppers.
The more sluggish growth in net revenue was mostly down to a weaker uplift in the pharmacy services division where generic dispensing and price deflation both continue to bite into sales. Fortunately, volumes are holding up well and we are confident that this part of the business will remain a powerhouse for CVS going forward.
The retail segment put in a solid performance, with sales rising by an above average 5.6% on a total basis and 5.8% in same-store terms. This is a good outcome, especially since, just as in the pharmacy services division, lower-priced generic drugs have exerted downward pressure on the top-line.
For once, CVS also has better news on the retail side where front of store comparable sales increased by 1.6%. While this break in the tradition of reporting negative numbers is to be celebrated, the growth does come with some caveats attached.
The first of these is the incredibly soft comparative from the prior year when front of store comparables fell by 4.9% thanks to a reduction of promotions and on less trading day. This obviously makes growth easier to attain this time around. It also highlights the fact that over a two-year period, CVS has still lost significant ground in retail.
The second point to note is the shift in the timing of Easter which, this year, fell into the first quarter. This contributed around 0.9 percentage points to growth which means, on an underlying basis, sales increased by a less robust 0.7%. On top of this, a particularly bad cold and flu season also boosted sales to the tune of 0.7 percentage points. When this is also accounted for, front of store comparables were actually flat over the prior year.
Such a dissection of the numbers may seem unfair; after all, CVS did generate growth no matter where this growth came from. However, a forensic examination is important as it underscores that the true retail part of CVS isn't delivering. As we have noted many times before, this is a major lost opportunity and one that CVS should remedy. Sadly, we see little sign of this happening and the retail offer remains down-at-heel and dingy, with no flair or imagination.
That noted, CVS does seem to be making some efforts in marketing. Its Beauty in Real Life campaign -- which features untouched and unaltered photos of women wearing cosmetics -- has been launched. We applaud this initiative which is in line with the values of modern consumers, particularly younger ones.
Unfortunately, campaigns for beauty products can only ever be truly effective if they are backed by a good beauty proposition. This, in our view, is still lacking. The irony of putting out marketing about feeling beautiful and then presenting the customer with a jumbled assortment of cosmetics in a sterile carpet-tiled store illuminated by yellow-tinged light from aging fluorescent bulbs seems to be lost on CVS.
Once again, the bottom line conclusion is that CVS needs to make more effort with retail. This is not just to make up ground in sales terms, it is also because CVS wants to increase its influence in health services. That requires good retail disciplines and will necessitate CVS to rethink the way it presents itself to shoppers.