CVS Caremark Corporation
) reported second-quarter 2013 adjusted earnings per share (EPS)
of 97 cents, up a significant 19.5% year over year. The result
also beat the Zacks Consensus Estimate by a penny. This reflects
the sixth consecutive quarter of positive earnings surprise for
CVS. The quarterly result tallies with the high end of the
company's expectation of 94 - 97 cents for the second-quarter.
Per management, the EPS upside was led by higher profitability on
the back of the generic wave in the pharmaceutical industry. On a
reported basis, net income was $1,121 million (or 91 cents),
higher than net income of $967 million (or 75 cents) in the
Quarter under Review
Net revenue improved 1.7% year over year to $31,248 million in
the second quarter, surpassing the Zacks Consensus Estimate of
The Pharmacy Services segment revenues increased 2% to $18,800
million in the quarter. The segment gained from drug cost
inflation in specialty pharmacy business and volume growth across
all channels. However, the generic wave in the pharmaceutical
industry adversely affected the segment revenues.
The higher claims from new client wins led to 4.1% year over year
rise in CVS' pharmacy network claims to 205.9 million. The new
client gains and ongoing adoption of the Maintenance Choice
program increased the Mail Choice claims processed to 20.7
million, up 1% on a year-over-year basis.
Revenues from CVS' Retail Pharmacy improved 1.9% year over year
to $16,139 million. Same-store sales increased 0.4% while
front-end same store sales declined 0.4% year over year. Same
store sales improved on account of higher same store prescription
volumes. This positive impact was partly tempered by the
introduction of generic drugs and unfavorable calendar shifts
(the shift of Easter holiday to the first-quarter 2013).
Front-end same store sales decline was attributed to the adverse
effect of 65 basis points (bps) from the shift of Easter holiday.
Pharmacy same store sales inched up 0.8% from the year-ago
quarter. Despite the generic introductions that dragged sales by
670 bps, CVS posted pharmacy same store sales growth. This is a
marked improvement from the first quarter.
Moreover, counting 90-day scripts as one script, pharmacy
same-store prescription volumes improved 1.8% from the year-ago
quarter. When 90-day scripts were converted into 3 scripts,
same-store prescription volumes grew 5% from the prior-year
The generic dispensing rate (the proportion of all generic
prescriptions to total number of prescriptions dispensed) soared
270 bps to 80.7% in the Pharmacy Services segment and 280 bps to
81.9% in the Retail Pharmacy segment.
Gross margin expanded 100 bps to 18.7% on the back of higher
profitability across both segments due to generic introductions.
Gross margin for the Pharmacy Services business improved 90 bps
to $5.1% while the same for the Retail Pharmacy segment was 31%,
up 90 bps from the year-ago quarter.
Operating expenses were up 3.4% on a year-over-year basis to
roughly $3,868 million in the quarter. However, operating margin
expanded 70 bps to 6.3%. Operating margin for the Pharmacy
Services segment expanded 80 bps to 3.6% while the same for
Retail Pharmacy franchise improved 60 bps to 9.9% in the quarter.
CVS exited the quarter with cash and cash equivalents and
short-term investments of $1,179 mllion, down from $1,380 million
at the end of 2012. Year-to-date net cash provided by operating
activities declined 36.7% to $2,542 million. This along with
year-to-date capital expenditure of $804 million (versus $818
million in the year-ago period) resulted in free cash flow of
almost $1,738 million year-to-date, down 45.7% from the year-ago
During the second quarter, CVS opened 23 new retail drugstores,
closed one retail drugstore and one retail specialty pharmacy
store. Further, the company relocated 24 retail drugstores. As of
Jun 30, 2013, CVS operated 7,617 locations, which include 7,553
retail drugstores, 18 onsite pharmacies, 30 retail specialty
pharmacy stores, 12 specialty mail order pharmacies and 4 mail
order pharmacies in 45 states, as well as the District of
Columbia and Puerto Rico.
Following the second quarter, CVS narrowed its guidance for 2013
adjusted EPS to the range of $3.90 - $3.96 compared with $3.89 -
$4.00 earlier. The current Zacks Consensus Estimate of $3.97 lies
outside the guidance range. The revision is on account of the
timing of share buyback activity.
On the other hand, CVS reiterated its expectations for 2013 free
cash flow and cash flow from operations in the range of $4.8 -
$5.1 billion and $6.4 - $6.6 billion, respectively. The guidance
includes the completion of the accelerated share repurchase
agreement of $4 billion.
For the third quarter of 2013, CVS expects adjusted EPS in the
band of $1.00- $1.03. The current Zacks Consensus Estimate of 97
cents lies below the company's outlook.
CVS continues to report strong quarterly results. We are
encouraged by CVS' second-quarter 2013 results which edged past
the Zacks Consensus Estimate. The company continues to benefit
from the introduction of generics that push profits higher. It
also witnessed robust double-digit growth in pharmacy benefit
management (PBM) on the back of a strong selling season.
Furthermore, same-store sales and pharmacy store sales also
improved after a weak first-quarter.
We are upbeat about CVS, owing to its consistent, stellar
earnings performance. Currently, the stock carries a Zacks Rank
#2 (Buy). Other Zacks Rank #2 stocks are
Cardinal Health, Inc.
). Another stock that looks attractive is
) that posted upbeat performance in the first quarter of fiscal
2014 last week. The stock carries a Zacks Rank #1 (Strong Buy).
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