CVS slowing down store expansion
CVS Health Corp. posted strong second-quarter earnings that easily beat Street estimates and raised its earnings forecast as it starts to reap the benefits of its acquisition of health insurer Aetna Inc.
But while the company is running on all cylinders, it is pulling back in the area of retail store growth. CVS will open approximately 100 stores this year, down from an average of 300 locations annually just a couple of years back, and only about 50 stores next year, CVS Pharmacy president Kevin Hourican told analysts on the company’s quarterly earnings call. On Tuesday, Walgreens Boots Alliance revealed in an SEC filing it plans to close 200 U.S. stores.
Hourican told CNBC that the reduction in store growth is “a natural change” given the number of stores CVS operates and the growth in areas such as delivery. (CVS has approximately 9,900 locations.) At the same time, the company will continue to remodel stores to its new, health-focused store “HealthHub” format. It plans to have a total of 1,500 HealthHubs in operation by the end of 2021.
In comments, analyst Neil Saunders, managing director of GlobalData Retail, said that while HealthHub represents an advancement of the traditional drug store, its design or thinking is not "radical enough."
"It represents a modest step forward rather than the leap up which CVS needs to take if it wants to become the Apple of wellness and health," he said. For more commentary by Saunders, click here.
CVS’s profit rose to $1.94 billion, or $1.49 a share in the quarter ended June 30, compared with a loss of $2.56 billion, or a loss of $2.52 a share, in the year-ago period. Adjusted earnings per share were $1.89, beating analysts’ estimates of $1.69 a share.
Revenue rose 35.2% to $63.43billion, also beating estimates. Revenue growth was primarily driven by the acquisition of Aetna, which the company acquired on Nov. 28, 2018, as well as increased volume and brand name drug price inflation in both the pharmacy services and retail/long term care segments.
CVS Health’s retail/long-term care segment saw revenues increase 3.7% for the quarter, which it primarily attributed to an uptick in prescription volume and branded drug price inflation, both of which were offset by reimbursement pressure and generic introductions.
CVS Health’s pharmacy services segment saw revenues increase 4.2% over the prior year, which it said was due to brand-name drug price inflation as well as increased total pharmacy claims volume, partially offset by continued price compression and an increased generic dispensing rate.
Operating income increased to $3.3 billion. However, operating expenses increased 65.2% compared to the prior year.
“These results demonstrate our ability to execute on our strategic priorities to accelerate enterprise growth as we seek to fundamentally transform the consumer health experience,” statedCVS Health president and CEO Larry Merlo. “Given our performance to date and our expectations for the remainder of the year, we are raising and narrowing our adjusted EPS guidance range to $6.89 to $7.00.