CVS Caremark Corporation
) reported third-quarter 2013 adjusted earnings per share (EPS)
of $1.05, up a significant 23.9% year over year. The result also
beat the Zacks Consensus Estimate by 3 cents. This reflects the
seventh consecutive quarter of positive earnings surprise for
The quarterly result exceeds the company's expectation of
$1.00- $1.03 for the third-quarter. Without these adjustments,
reported EPS in the quarter surged 29.5% to $1.03.
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 5.8% year over year to $31.97 billion in
the third quarter, surpassing the Zacks Consensus Estimate of
The Pharmacy Services segment revenues increased 7.8% to $1.4
billion in the quarter. The segment gained from drug cost
inflation in specialty pharmacy business and broad-based growth
of claims. However, the generic wave in the pharmaceutical
industry adversely affected the segment revenues.
The higher claims from new client wins led to 2.0% year over
year rise in CVS' pharmacy network claims to 200.9 million. 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 5.0% year over
year to $16.3 billion. Same-store sales increased 3.6% while
front-end same store sales declined 1.0% 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 quarter.
Pharmacy same store sales were up 5.7% from the year-ago
quarter. Despite the generic introductions that dragged sales by
320 bps, CVS posted pharmacy same store sales growth.
Moreover, counting 90-day scripts as one script, pharmacy
same-store prescription volumes improved 1.4% from the year-ago
quarter. When 90-day scripts were converted into 3 scripts,
same-store prescription volumes grew 4.5% from the prior-year
The generic dispensing rate (the proportion of all generic
prescriptions to total number of prescriptions dispensed) soared
170 bps to 81.0% in the Pharmacy Services segment and 160 bps to
81.5% in the Retail Pharmacy segment.
Gross margin expanded 19 bps to 18.9% on the back of higher
profitability across both segments due to generic introductions.
Gross margin for the Pharmacy Services business improved 60 bps
to $6.6% while the same for the Retail Pharmacy segment was 30%,
down 10 bps from the year-ago quarter.
Operating expenses were up 1.1% on a year-over-year basis to
roughly $3.9 billion in the quarter. However, operating margin
expanded 76 bps to 6.8%. Operating margin for the Pharmacy
Services segment expanded 90 bps to 5.2% while the same for
Retail Pharmacy franchise improved 60 bps to 9.0% in the
CVS exited the quarter with cash and cash equivalents and
short-term investments of $1.61 bllion, down from $1.38 billion
at the end of 2012. Year-to-date net cash provided by operating
activities declined 14.1% to $4.2 billion. This along with
year-to-date capital expenditure of $1.30 billion (versus $1.31
billion in the year-ago period) resulted in free cash flow of
almost $3.07 million year-to-date, down 24.3% from the year-ago
During the third quarter, CVS opened 49 new retail drugstores
and closed one retail drugstore. Further, the company relocated
22 retail drugstores. As of Sep 30, 2013, CVS operated 7,665
locations, which include 7,601 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 third quarter, CVS raised its guidance for 2013
adjusted EPS to the range of $3.94 - $3.97 compared with $3.90 -
$3.96 earlier. The current Zacks Consensus Estimate of $3.95 lies
within the guidance range.
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.
CVS continues to report strong quarterly results. We are
encouraged by CVS' third-quarter 2013 results which edged past
the Zacks Consensus Estimate in both ways. 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
We are upbeat about CVS, owing to its consistent, stellar
earnings performance. Currently, the stock carries a Zacks Rank
#2 (Buy). Other better-performing stock that are worth a look
Rite Aid Corp.
) carrying a Zacks Rank #1 (Strong Buy) and
GNC Holdings Inc.
) both carrying a Zacks Rank #2 (Buy).
CVS CAREMARK CP (CVS): Free Stock Analysis
GNC HOLDINGS (GNC): Free Stock Analysis
HERBALIFE LTD (HLF): Free Stock Analysis
RITE AID CORP (RAD): Free Stock Analysis
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