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A Quick Overview of CVS Health’s 1Q18 Profitability

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May. 7 2018, Updated 1:20 p.m. ET

CVS Health’s 1Q18 profit beat

While CVS Health (CVS) fumbled with its 1Q18 top-line expectations, it still managed to cruise ahead of Wall Street’s bottom-line forecasts. Adjusted earnings per share increased 26.5% YoY to $1.48, 7 cents more than Thomson Reuters I/B/E/S Estimates. This was the ninth consecutive earnings beat for the company.

“We generated solid results in the quarter, benefiting from higher prescription volumes within our retail pharmacy business and a lower effective income tax rate,” said Larry Merlo, president and CEO.

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About 1Q18 margins

The company’s gross margin improved marginally during the quarter to 15% of sales, due mainly to a better sales mix. Gross profit increased 4.4% YoY, driven by a 5.1% YoY increase in gross profit dollars at the pharmacy services business and a 4.1% YoY increase in the Retail/Long-Term Care segment’s gross profit.

The gross margin at the pharmacy services segment remained flat at 3.5% during the quarter, while the Retail/LTC segment’s gross margin fell 40 basis points to 29% due to ongoing pressure on the reimbursement rate.

Adjusted operating profit increased 3.4% YoY to $2.1 billion, driven by lower store rationalization costs and a higher gross margin.

Guidance update

Management provided an outlook for fiscal 2018 and the second quarter along with the 1Q18 results. The company expects its GAAP (generally accepted accounting principles) operating profit growth to range between -0.25% and +2.75%, and it expects its adjusted operating profit growth to range between -1.5% and +1.5%. CVS expects its fiscal 2018 adjusted earnings per share to range between $6.87 and $7.08, above the consensus expectation of $6.47 for the quarter.

For the second quarter, management has guided for an adjusted earnings per share range of $1.59–$1.64, reflecting 21% growth at the midpoint.

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