Why Same-Store Sales for CVS Health May Fall in 2Q15



CVS Health’s same-store sales projections for 2Q15

CVS Health (CVS) expects 2Q15 total same-store sales to come in between -1.25% and 0.25%. Adjusted script comps (comparables) growth is projected between 4.25% and 5.25%.

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Historical comps trend

The average same-store sales growth for CVS’s Retail Pharmacy segment was 1.2% in 1Q15. Pharmacy Services same-store sales rose 5.1% on a 30-day equivalent basis. Pharmacy Services same-store sales had a 2.8% negative impact by the introduction of new generics in the quarter.

The company’s Specialty Connect program also affected comps by 1.9%. Revenue from this program is recognized in the Pharmacy Services segment and is currently in the process of transitioning.

Tobacco sales impact

CVS’s comps were affected by the discontinuation of tobacco sales and related products on October 1, 2014. This reduced front store sales comps by 8%, which was ~1% less than originally anticipated. Front store sales comps came in at -6.1%.

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Peer group performance

Wal-Mart Stores (WMT), which also operates pharmacies in its US and Sam’s Club stores, reported a mid-single-digit increase in health and wellness merchandise for its US stores in the last quarter. Sam’s Club comps for the category rose in the low-single-digit range.

Target (TGT) has also been increasing its health and wellness focus. Target’s decision to sell its pharmacy business to CVS Health (CVS) for $1.9 billion will allow Target to focus on more complementary products to CVS’s pharmacy business such as in health and wellness.

2Q15 comps trends

Comps growth in 2Q15 will likely be affected by the discontinuation of the sale of tobacco products. CVS expects an impact of ~8% on 2Q15 front store comps, the same as 1Q15.

While CVS’s top line would be affected, this may not be a bad thing in terms of profitability. Margins on tobacco products are typically lower. Also, the front store part of the pharmacy usually yields higher margins. Discontinuation of tobacco products would lead to higher profitability as well as free up space for more high-margin products.

CVS, Wal-Mart, and Target together constitute ~1.6% of the portfolio holdings in the iShares Russell 1000 Value ETF (IWD). They also make up ~3% of the holdings of the SPDR S&P Retail ETF (XRT).


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