) reported third quarter 2012 earnings per share (EPS) of 79
cents, up 21.5% year over year. However, after excluding the
impact of certain acquisition related expenses from both the
periods, the adjusted EPS in the reported quarter came in at 85
cents, ahead of the Zacks Consensus Estimate by a penny and 21.4%
higher than the year-ago quarter.
Net revenue during the quarter increased 13.3% year over year
to $30.2 billion, in line with the Zacks Consensus Estimate. The
Pharmacy Services segment posted a robust 22.2% increase in
revenues to $18.1 billion during the reported quarter. The
company benefited from client additions during the fiscal 2012
selling season, drug cost inflation and growth in the Medicare
Part D business, which the company acquired from
Universal American Corp
) last year.
All these factors also led to a 10.0% year-over-year increase
in CVS' pharmacy network claims to 197.0 million. The new client
gains and the ongoing adoption of the Maintenance Choice program
also drove the Mail Choice claims processed growth by 16.3% to
Revenues from CVS' Retail Pharmacy increased 5.5% to $15.5
billion with same-store sales climbing 4.3%.
) loss of the
) contract in January 2012, coupled with a strong underlying
prescription growth supported the company's pharmacy same-store
sales, which grew 5.3% in the quarter. Front-end same-store sales
increased 2.2% year over year.
Additionally, when 90-day scripts were counted as one script,
pharmacy same-store prescription volumes climbed up 8.7%. When
90-day scripts were converted into 3 scripts, same-store
prescription volumes increased 11.1% year over year. On account
of the recent generic introductions, pharmacy same-store sales
witnessed a decline of 905 basis points (bps).
The generic dispensing rate (the proportion of all generic
prescriptions to total number of prescriptions dispensed) in the
quarter increased 500 bps to 79.3% in the Pharmacy Services
segment and 420 bps to 79.9% in the Retail Pharmacy segment.
Gross margin during the quarter contracted 73 bps to 18.7%.
Operating expenses were up 6.6% on a year-over-year basis to $3.8
billion. However, operating margin remained almost flat year over
year at 6.0%.
CVS exited the third quarter with cash and cash equivalents of
$1.23 billion, compared to $1.41 billion at the end of fiscal
2011. Year-to-date net cash provided by operating activities were
$4.9 billion compared to $5.0 billion for the same period last
During the third quarter, CVS opened 45 new retail drugstores,
closed 3 retail drugstores. Additionally, the company relocated
18 retail drugstores. At the end of the quarter, CVS operated
7,500 locations, which include 7,423 retail drugstores, 28 onsite
pharmacies, 31 retail specialty pharmacy stores, 12 specialty
mail order pharmacies and 6 mail order pharmacies in 44 states,
as well as the District of Columbia and Puerto Rico.
Anticipating a benefit from the company's accelerated share
repurchase program (announced in September 2012) and its
expectation about retaining at least 60% of the prescriptions
gained from the Walgreen and Express Scripts impasse, the company
is raising and narrowing its guidance for 2012. The company now
expects adjusted EPS of $3.38−$3.41 (earlier guidance being
$3.32−$3.38). The current Zacks Consensus Estimate of $3.36
remains below the guidance range.
The company reiterated its 2012 free cash flow and cash flow
from operations guidance at $4.6-$4.9 billion and $6.2-$6.4
billion, respectively. The fiscal 2012 guidance includes the
completion of the accelerated share repurchase agreement of $1.2
We are encouraged by the improved performance of CVS' Pharmacy
Services segment, mainly on account of significant new client
wins in a strong 2012 selling season. However, earlier in July,
the long-standing contractual dispute between Walgreen and
Express Scripts came to an end with both the companies announcing
a multi-year retail pharmacy network agreement.
Although CVS is still optimistic about retaining at least 60%
of the business gained from the dispute through the fourth
quarter 2012, we prefer to remain on the sidelines until
visibility improves in this regard.
However, the mega-merger between Express Scripts and Medco
Health Solutions in April this year further intensified the
competitive landscape in the PBM industry and put CVS in a tight
spot. Moreover, concerns linger given the margin pressure felt by
CVS currently retains a short-term Zacks #2 Rank (Buy). Over
the long term (3-6 months), we have a Neutral recommendation on
CVS CAREMARK CP (CVS): Free Stock Analysis
EXPRESS SCRIPTS (ESRX): Free Stock Analysis
UNIVL AMERICAN (UAM): Free Stock Analysis
WALGREEN CO (WAG): Free Stock Analysis Report
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