Inclement winter weather, a weak flu season and this year's later Easter holiday reined in sales growth in CVS Caremark Corp.'s retail drug store business for the 2014 first quarter.

CVS Caremark, 2014 first quarter, CVS/pharmacy, Larry Merlo, pharmacy benefit management, PBM, retail pharmacy, pharmacy services, front end, pharmacy, same-store sales, comparable pharmacy sales, prescription count, script count, drug store, front-end sales, customer traffic, basket size, new generic drugs, Coram, specialty pharmacy business, Maintenance Choice, Mark Miller, William Blair & Co.

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CVS Caremark posts 1Q gains, but earnings miss

May 2nd, 2014

WOONSOCKET, R.I. – Inclement winter weather, a weak flu season and this year's later Easter holiday reined in sales growth in CVS Caremark Corp.'s retail drug store business for the 2014 first quarter.

Adjusted earnings per share (EPS) for the first quarter also fell just short of Wall Street analysts' forecast and the company's guidance.

CVS said Friday that overall revenue for the three months ended March 31 rose 6.3% to $32.7 billion from $30.8 billion a year earlier.

Sales in the CVS/pharmacy drug store segment edged up 2.7% to $16.5 billion from about $16 billion a year ago. Same-store sales were up 1.4%, reflecting a gain of 3.8% in the pharmacy and a decrease of 3.8% in the front end. Comparable pharmacy prescription count rose 2.1% on a 30-day equivalent basis.

According to CVS, comparable-store sales in the front end and pharmacy during the first quarter were negatively impacted by a weaker flu season and severe weather across much of the country. The company estimated that the bad weather and the comparison with last year's strong flu season negative impacted to comparable pharmacy script count by 180 to 200 basis points.

The shift of Easter to April 20 this year from March 31 in 2013, along with softer customer traffic, also negatively impacted front-end sales in the first quarter by about 80 basis points, CVS reported. In addition, the extreme weather in the quarter and the comparison against last year's strong flu season led to a negative impact of 140 to 160 basis points on front-end same-store sales, the company added.

Still, basket size in the front end improved modestly, and front-end margins improved notably during the first quarter, CVS noted.

"CVS has stayed above the promotional fray, redirecting its marketing spending away from ad circulars toward more personalized promotions with top customers," William Blair & Co. analyst Mark Miller said in a research note Friday. "Retail gross margins of 31.5% were 20 basis points ahead of our forecast and up 60 basis points year to year."

According to CVS, the gain in total same-store sales stemmed mainly from the increase in prescriptions filled and cost inflation of brand-name drugs, the company said, adding that comparable pharmacy sales reflected a negative impact of about 120 basis points from introductions of new generic drugs, which carry lower selling prices but higher profit margins.

In the pharmacy benefit management (PBM) segment, or pharmacy services, revenue totaled $20.2 billion in the first quarter, up 10.3% from $18.3 billion a year earlier. CVS said the gain came primarily from growth in our specialty pharmacy business, including the acquisition of Coram, as well as from drug cost inflation, new clients and new products. Pharmacy network claims processed during the quarter 2014 increased 0.4% to 208 million, and mail choice claims processed declined 3.6% to 19.8 million. The decrease in mail choice claims was driven by a decline in traditional mail volumes, which was partially offset by growth in the Maintenance Choice program, according to CVS.

During the first quarter, the generic dispensing rate rose abut 170 basis points to 82.9% in the retail pharmacy segment and 190 basis points to 82.4% in the PBM segment.

CVS Caremark's net earnings (GAAP) for the first quarter came in at $1.1 billion, or 95 cents per diluted share, compared with about $1 billion, or 77 cents per diluted share, a year earlier.

First-quarter adjusted EPS was $1.02, compared with 83 cents in the prior-year period, and excluded $131 million and $122 million in 2014 and 2013, respectively, of intangible asset amortization related to acquisition activity. On average, analysts had forecast CVS' first-quarter adjusted EPS at $1.04, with estimates ranging from a low of $1.02 to a high of $1.06, according to Thomson Financial.

CVS said net income in the retail pharmacy and PBM businesses in the first quarter benefited from the impact of increased generic drugs dispensed and slower growth in expenses. Net earnings was got a lift from rebate improvement in the pharmacy services segment and increased front-end gross margins at CVS/pharmacy.

Also during the first quarter, operating profit rose 19.5% to approximately $2 billion, and the company generated free cash flow of $1.8 billion, with cash flow from operations of $2.2 billion.

"We once again posted a very strong quarter, with solid results across the enterprise," Larry Merlo, president and chief executive officer of CVS Caremark, said in a statement. "Adjusted EPS increased 22.5%, to $1.02, which was a penny below our expectations primarily due to the significant amount of unforeseen weather-related issues we experienced throughout the quarter. I'm particularly pleased with the exceptional growth in the PBM, especially the growth of the specialty pharmacy business. Additionally, with the substantial amount of free cash we generated during the quarter, we remain confident in our ability to achieve our 2014 goals."

CVS said it opened 22 new retail drug stores, relocated nine drug stores and closed seven retail drug stores, one specialty retail pharmacy and one infusion branch during the first quarter. As of March 31, the company operated a total of 7,675 retail drug stores, as well as 17 on-site pharmacies, 24 retail specialty pharmacy stores, 11 specialty mail-order pharmacies, four mail-service dispensing pharmacies, and 84 branches and six centers of excellence for infusion and enteral services.

Looking ahead, CVS confirmed its fiscal 2014 earnings guidance, with adjusted EPS forecast at $4.36 to $4.50. Analysts, on average, project the company's full-year adjusted EPS at $4.47, with estimates running from a low of $4.42 to a high of $4.53, according to Thomson Financial.

CVS also said it expects adjusted EPS of $1.08 to $1.11 for the 2014 second quarter. Analysts' estimates for the period range from $1.05 to $1.12, with an average forecast of $1.09.

*Editor's Note: Article updated with analyst comment.