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Can CVS’ Front Store Business Overcome these Key Headwinds?

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Front store sales performance

CVS Health (CVS) reported that its front store comps were down 7.8% in 2Q15. Front store comps were affected by the company’s exit from the sale of tobacco products, which reduced comps by 7.8%. However, the company also reported weak traffic trends to its front store business, although the average basket size was larger.

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Health and beauty focus

CVS expanded its healthy snack food offering in 275 stores and plans to take this to 450 stores by the end of 2015. The company is also looking to roll out a revamped beauty section in thousands of stores this year and in 2016. CVS reported an increase in its market share for health and beauty products in both the drugstore and multi-outlet channels.

Convenience store trends

Drugstore chains like CVS are increasing their focus on health food, wellness, and beauty products. However, they are likely to face increasing competition from mass merchandisers like Walmart (WMT) and Target (TGT). Both Walmart and Target are also stepping up their focus on the small-format store, particularly across urban areas, which could erode the competitiveness of CVS and peers.

To read more on why retailers are looking closely at the small format store opportunity, read Walmart Plans to Allocate Capital to High-Growth Store Formats.

Private brands

The Retail Pharmacy segment’s sales and bottom line benefited from higher penetration of store brands, which touched 20.9%, an improvement of ~1.45%[1. Excluding the impact of the exit from tobacco products]. The company hopes to improve its penetration rate to 25%.

Walgreens Boots Alliance (WBA) and Rite Aid (RAD) are also stepping up their focus on private brands. Private brands are margins enhancers, particularly relevant at a time when CVS is experiencing reimbursement pressure. Private brands penetration came in at 18.5% of front-end sales for Rite Aid in fiscal 2015[1. Fiscal year ending February 28, 2015].

While WBA doesn’t disclose private label penetration rates, it has some very strong brands in Well at Walgreens, No7, Botanics, Soap and Glory, and its recently acquired Boots Pharmaceuticals.

CVS makes up ~1.2% of the portfolio holdings in the iShares S&P 500 Growth ETF (IVW) and 1.1% in the holdings of the iShares Russell 1000 Growth ETF (IWF).

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