CVS Caremark Corporation
) reported first-quarter 2014 adjusted earnings per share (EPS)
of $1.02, up a significant 22.9% year over year. However, the
result missed the Zacks Consensus Estimate by 3 cents as well as
the company-provided guidance range of $1.03 to $1.06 per share.
Without the one-time adjustments, reported EPS in the first
quarter surged 23.3% to 95 cents.
Per management, the EPS failed to meet the guidance because of
severe unforeseen weather-related issues that the company
experienced throughout the reported quarter.
Quarter Under Review
Net revenue improved 6.3% year over year to $32.69 billion,
closely beating the Zacks Consensus Estimate of $32.54
The Pharmacy Services segment revenues increased 10.3% to
$20.2 billion in the quarter. The segment gained from growth in
specialty pharmacy business, including the acquisition of Coram,
as well as drug cost inflation, new clients and new products.
Pharmacy network claims that were processed during the quarter
edged up 0.4% to 208.9 million. This increase was owing to new
client starts. However, decline in traditional mail volumes,
which was partially offset by growth in Maintenance Choice
program, brought the Mail Choice claims processed to 19.8
million, down 3.6%.
Revenues from CVS' Retail Pharmacy improved 2.7% year over
year to $16.5 billion. Same-store sales increased 1.4% while
front-end same store sales declined 3.8% year over year.
Same-store sales improved on account of growth in prescription
volumes and brand name drug cost inflation.
This positive impact was partly tempered by the introduction
of generic drugs. Front-end same-store sales decline was
attributed to weaker flu season and severe weather in most part
of the U.S. Front store same-store sales were also negatively
impacted by approximately 80 basis points due to a delayed Easter
(from Mar 2013 to Apr 2014) as well as softer customer
Pharmacy same store sales were up 3.8% from the year-ago
quarter. Despite the generic introductions that dragged sales by
120 bps, CVS posted pharmacy same-store sales growth. Moreover,
Pharmacy same-store prescription volumes rose 2.1% on a 30-day
The generic dispensing rate (the proportion of all generic
prescriptions to total number of prescriptions dispensed) soared
190 bps to 82.4% in the Pharmacy Services segment and 170 bps to
reach 82.9% in the Retail Pharmacy segment.
With a 6.5% increase in gross profit to $5.9 billion, gross
margin expanded 4 bps to 18.2%.Gross margin for the Pharmacy
Services business was 4.6%, registering an expansion of 40 bps
year over year. The same for the Retail Pharmacy segment was
31.4%, up 60 bps from the year-ago quarter. Operating expenses
were marginally up 1% on a year-over-year basis to roughly $3.9
billion in the quarter. Operating margin expanded 68 bps to
CVS exited the quarter with cash and cash equivalents and
short-term investments of $2.85 billion, down from $4.09 billion
at the end of 2012. Net cash provided by operating activities for
the year increased 32.4% to $2.17 billion. This resulted in free
cash flow of $1.8 billion for the reported quarter.
During the first quarter, CVS opened 22 new retail drugstores
and closed 7 retail drugstores,one specialty retail pharmacy and
one infusion branch. Further, the company relocated 9 retail
As of Mar 31, 2014, CVS operated 7,829 locations, which
include 7,675 retail drugstores, 17 onsite pharmacies, 24 retail
specialty pharmacy stores, 11 specialty mail order pharmacies, 4
mail service dispensing pharmacies and 84 branches and six
centers of excellence for infusion and enteral services in
47 states, as well as the District of Columbia, Puerto Rico and
Following the end of the first quarter 2014, CVS reconfirmed
its adjusted EPS guidance for 2014 in the range of $4.36 to
$4.50. The current Zacks Consensus Estimate of $4.47 falls within
the guidance range.
The company also reiterated its 2014 free cash flow and cash
flow from operations guidance in the ranges of $5.5 to $5.8
billion and $7.0 to $7.3 billion respectively.
For the second quarter of 2014, the company expects to report
adjusted EPS in the range of $1.08 to $1.11. The current Zacks
Consensus Estimate of $1.09 falls close to the lower end of the
After several quarters of strong performance, CVS provided an
unimpressive first quarter with an earnings miss and a marginal
beat to the top line. CVS is facing higher costs associated with
its Medicare Part D business that might hamper operating profit
in the pharmacy benefit management (PBM) franchise.
However, we are upbeat with solid growth in the PBM,
especially the growth of the specialty pharmacy business.
Moreover, having generated strong free cash flow in the quarter,
the company is confident of achieving its 2014 goals.
CVS continues to benefit from the introduction of generics
that pushed profits higher. It also witnessed robust double-digit
growth in PBM on the back of a strong selling season.
Currently, the stock carries a Zacks Rank #2 (Buy). Some of
the better-placed stocks in the broader Medical sector are
Cardinal Health, Inc.
The Cooper Companies Inc.
), all carrying a Zacks Rank #2 (Buy).
CARDINAL HEALTH (CAH): Free Stock Analysis
COOPER COS (COO): Free Stock Analysis Report
CVS CAREMARK CP (CVS): Free Stock Analysis
HOLOGIC INC (HOLX): Free Stock Analysis
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