CVS Caremark Corp. saw revenue and profit fall for its fiscal 2010 fourth quarter and full year as a weak performance by its pharmacy benefit management business dragged down overall results.


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Sales, earnings falter in 4Q at CVS Caremark

February 3rd, 2011

WOONSOCKET, R.I. – CVS Caremark Corp. saw revenue and profit fall for its fiscal 2010 fourth quarter and full year as a weak performance by its pharmacy benefit management business dragged down overall results.

However, the retail pharmacy business turned in sales gains, and the company's adjusted earnings per share were in line with Wall Street analyst estimates.

CVS Caremark said Thursday that total revenue for the three months ended Dec. 31 decreased 4.1% to $24.8 billion from $25.8 billion a year earlier.

In the retail pharmacy segment, fourth-quarter sales rose 3.1% to $14.9 billion, and same-store sales edged up 1.7% year over year. Same-store sales were up 2% in the the pharmacy and 1% in the front end. The company said pharmacy same-store results reflect a 250-basis-point negative impact from recent generic drug introductions and a net 220-basis-point positive impact from the Maintenance Choice program, in which mail-order customers can choose to pick up their prescriptions at a CVS retail store.

Fourth-quarter revenue in the PBM segment dropped 9.7% year over year to $12.2 billion. CVS Caremark noted that the decline stemmed mainly from the termination of some large client contracts and the decrease in the number of covered lives under its Medicare Part D program, although new client starts effective Jan. 1 partially offset lost business. The company added that, adjusting for the impact of new generics, sales in the segment would have decreased by 2.4%.

On the earnings side, income from continuing operations attributable to CVS Caremark for the fourth quarter was down 2.3% to $1.027 billion from $1.051 billion in the prior-year period. Adjusted earnings per share (EPS) from continuing operations attributable to CVS Caremark, which excludes $108 million of intangible asset amortization related to acquisition activity, came in at 80 cents, compared with 79 cents a year earlier.

The average estimate of analysts for CVS Caremark's fourth quarter was for earnings of 79 cents per share, with the forecast ranging from a low of 77 cents per share to a high of 80 cents, according to Thomson Financial.

"I'm pleased with our earnings this quarter, which were in line with our expectations. Our retail business continued to produce industry-leading same store sales and achieved an all-time record operating margin," Larry Merlo, president and chief operating officer of CVS Caremark, said in a statement. "The PBM business made significant progress last year, with a strong 2011 selling season, high client-retention rates, and the introduction of unique products and services that leverage our combined retail and PBM assets.

"We also launched the PBM streamlining initiative, which is expected to generate more than a billion dollars in savings over the next five years," added Merlo, who next month is slated to take over as chief executive officer from Tom Ryan. "Furthermore, we have focused our resources and investments on key strategic growth areas, such as Medicare Part D. I'm very confident about our long-term prospects across the enterprise and committed to ensuring our success as I take the reins as CEO this March."

For the 2010 fiscal year ended Dec. 31, CVS Caremark's total revenue dipped 2.3% to $96.4 billion from $98.7 billion a year ago. Retail pharmacy sales climbed 3.6% to $57.3 billion, while revenue in the PBM segment fell 6.4% to $47.8 billion.

Full-year income from continuing operations attributable to CVS Caremark decreased 7.2% to $3.4 billion. Meanwhile, adjusted EPS from continuing operations attributable to CVS Caremark, which excludes $427 million of intangible asset amortization related to acquisition activity, came in at $2.69, down from $2.74 a year earlier. Analysts, on average, projected full-year earnings of $2.69 per share, with estimates running from a low of $2.66 to a high of $2.72, Thomson Financial reported.

"CVS reported a slight beat in fourth-quarter 2010 with an adjusted EPS of  80 cents, 1 cents above consensus and 2 cents ahead of our estimate. The beat appears related primarily to a lower tax rate, as operating metrics look slightly weaker than anticipated," Sanford Bernstein & Co. analyst Helene Wolk wrote in a research note on CVS Caremark's financial results.

"Retail same-store sales in the fourth quarter disappointed, with the total same-store sales [increase] of 1.7% falling below the consensus [analyst estimate] of 2.1%, which is likely to be an area of concern given accelerating comps reported by retail drug peers," Wolk stated. "Pharmacy comps came in light at [a gain of] 2%, below our estimate of 2.3% and the consensus at 2.5%. Front-end comps were 1%, below our expected 1.3% and slightly below consensus."

William Blair & Co. analyst Mark Miller also said CVS Caremark turned in a lackluster comparable-store performance in the quarter. "Fourth-quarter retail comp-store sales rose 1.7%, below our 2.5% forecast and the Street consensus forecast of 2.4%. We are surprised by these soft comp-sales results in view of improving sales trends at Walgreens and Rite Aid during the October-to-December time frame," Miller said in an analysis of CVS Caremark's 2010 fourth-quarter results.

CVS Caremark said that during the quarter it opened 32 new drug stores, closed two stores and relocated seven stores. As of Dec. 31, the company operated 7,182 retail drug stores, as well as 44 specialty pharmacy stores, 18 specialty mail-order pharmacies and four mail-order pharmacies in 44 states, the District of Columbia and Puerto Rico.

Looking ahead, CVS Caremark gave its initial guidance for 2011. The company projects adjusted diluted EPS from continuing operations of $2.72 to $2.82. As of Thursday morning, that was below the average analyst estimate of $2.89, with the forecast ranging from a low of $2.80 to a high of $2.95, according to Thomson Financial. 

CVS Caremark noted that its 2011 guidance includes the benefit of its acquisition of Universal American's Medicare Part D business, assuming a closing date late in the second quarter, as well as costs related to its PBM segment streamlining initiative. The company's guidance also assumes the completion in 2011 of a $2 billion share repurchase program authorized last year.  

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