CVS Caremark Corporation
) reported third-quarter 2013 adjusted earnings per share (EPS)
of $1.12, up a significant 16.7% year over year. The result also
beat the Zacks Consensus Estimate by a penny.
This reflects the eighth consecutive quarter of positive
earnings surprise for CVS. The quarterly result coincides with
the upper end of the company's EPS expectation of
However, excluding 17 cents of loss incurred in the year-ago
quarter due toearly extinguishment of debt, the adjusted earnings
increased 1.9% in the reported quarter. Without these
adjustments, reported EPS in the fourth quarter surged 16.7% to
Adjusting for certain one-time items (like intangible asset
amortization, gain from a legal settlement and loss on early
extinguishment of debt recognized in the fourth quarter of 2012),
EPS for full year 2013 came in at $3.96, in line with the Zacks
Consensus estimate and up 15.7% from the prior-year period. This
adjusted EPS for the year also falls at the upper-end of the
company provided guidance range of $3.94 - $3.97.
Per management, the EPS upside was led by higher profitability
on the back of increased generic drugs dispensed and the growth
of Maintenance Choice program in the Pharmacy Services and Retail
Quarter Under Review
Net revenue improved 4.6% year over year to $32.83 billion in
the fourth quarter, closely beating the Zacks Consensus Estimate
of $32.68 billion. Full-year revenues increased 3.0% to $126.76
billion, marginally ahead of the Zacks Consensus Estimate of
The Pharmacy Services segment revenues increased 5.2% to $19.6
billion in the quarter. The segment gained from drug cost
inflation, new products and new clients in specialty pharmacy
Pharmacy network claims that were processed during the quarter
slipped 0.3% to 204.9 million. This was due to fewer Medicare
Part D claims which resulted from lower membership as per
sanctions placed on the company in 2013 by the Centers for
Medicare and Medicaid Services.
The new client gains and ongoing adoption of the Maintenance
Choice program increased the Mail Choice claims processed to 21.0
million, up 3.1% on a year-over-year basis.
Revenues from CVS' Retail Pharmacy improved 5.6% year over
year to $17.2 billion. Same-store sales increased 4.0% while
front-end same store sales declined 1.9% year over year. Same
store sales improved on account of higher same-store prescription
This positive impact was partly tempered by the introduction
of generic drugs. Front-end same-store sales decline was
attributed to softer traffic during the quarterwhich was
partially offset by an increase in basket size.
Pharmacy same store sales were up 6.8% from the year-ago
quarter. Despite the generic introductions that dragged sales by
230 bps, CVS posted pharmacy same-store sales growth.
Moreover, counting 90-day scripts as one script, pharmacy
same-store prescription volumes inched up 0.8% from the year-ago
quarter. When 90-day scripts were converted into 3 scripts,
same-store prescription volumes grew 3.8% from the prior-year
The generic dispensing rate (the proportion of all generic
prescriptions to total number of prescriptions dispensed) soared
110 bps each to 81.1% in the Pharmacy Services segment and 81.0%
in the Retail Pharmacy segment.
With a nominal 0.7% increase in gross profit to $6.3 billion,
gross margin contracted 74 bps to 19.3%. Gross margin for the
Pharmacy Services business was $6.17%, registering a contraction
of 98 bps year over year. The same for the Retail Pharmacy
segment was 30.7%, down 60 bps from the year-ago quarter.
Operating expenses were up 3.2% on a year-over-year basis to
roughly $4.1 billion in the quarter. However, operating margin
contracted 57 bps to 6.8%. Operating margin for the Pharmacy
Services segment contracted 100 bps to 4.6% while the same for
the Retail Pharmacy franchise remained marginally in line at 9.7%
in the quarter.
CVS exited the quarter with cash and cash equivalents and
short-term investments of $4.17 bllion, down from $1.38 billion
at the end of 2012. Net cash provided by operating activities for
the year declined 13.3% to $5.8 billion. This resulted in free
cash flow of $4.04 billion for the reported fiscal year.
During the fourth quarter, CVS opened 60 new retail drugstores
and closed one retail drugstore. Further, the company relocated
17 retail drugstores, andclosed one retail drugstore, one onsite
pharmacy, five specialty retail pharmacies and one specialty mail
As of Dec 31, 2013, CVS operated 7,717 locations, which
include 7,661 retail drugstores, 17 onsite pharmacies, 25 retail
specialty pharmacy stores, 11 specialty mail order pharmacies and
4 mail service dispensing pharmacies in 46 states, as well as the
District of Columbia and Puerto Rico.
Following the end of the fourth quarter and year 2013, CVS
reconfirmed its adjusted EPS guidance for 2014 which was earlier
provided during its annual analyst day on Dec 18, 2013. This
guidance assumes $4.0 billion in share repurchase.
However, the company raised its 2014 free cash flow and cash
flow from operations guidance to the range of $5.5 to $5.8
billion (from $5.1 to $5.4 billion) and $7.0 to $7.3 billion
(from $6.6 to $6.9 billion). This change was due to shift in
timing of certain cash receipts to early 2014 from late 2013.
For the first quarter of 2014, the company expects to report
adjusted EPS in the range of $1.03 to $1.06. The current Zacks
Consensus Estimate of 98 cents falls short of the guidance
CVS continues to report strong quarterly results. We are
encouraged by CVS' fourth-quarter 2013 results which edged past
the Zacks Consensus Estimate on both fronts. The company
continues to benefit from the introduction of generics that
pushed 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. However, pressure on margin remains a major downside
during the quarter.
Currently, the stock carries a Zacks Rank #3 (Hold). Some of
the better-placed stocks in the broader medical sector includes
Almost Family Inc.
DaVita HealthCare Partners Inc.
Addus HomeCare Corporation
). While AFAM holds a Zacks Rank #1 (Strong Buy), ADUS and DVA
carry a Zacks Rank #2 (Buy).
ADDUS HOMECARE (ADUS): Free Stock Analysis
ALMOST FAMILY (AFAM): Free Stock Analysis
CVS CAREMARK CP (CVS): Free Stock Analysis
DAVITA HEALTHCR (DVA): Free Stock Analysis
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