) reported first quarter 2012 EPS of 59 cents, up 13.5% year over
year. However, after excluding the impact of certain one-time items
from both the periods, adjusted EPS came in at 65 cents, beating
the Zacks Consensus Estimate of 63 cents and 14.0% higher than the
Net revenue during the quarter increased 19.9% year over year to
$30.8 billion, beating the Zacks Consensus Estimate of $30.4
The robust increase in the company's earnings during the quarter
was primarily on the back of an 18.4% increase in operating profit
in its Retail Pharmacy segment that considerably benefited from the
) retail contract.
Additionally, an extra day due to the leap year combined with
Maintenance Choice program gaining further momentum also
contributed to the improvement in the company's bottom line.
Moreover, accountings change (effective January 1, 2012) for the
prescription drug inventories of CVS' Retail Pharmacy segment
resulted in an after tax benefit of one cent per share, during the
The Pharmacy Services segment posted a robust 32.3% increase in
revenues to $18.3 billion during the reported quarter. The company
benefited from the acquisition of the Medicare Part D business of
Universal American Corp
) last year, new client additions and drug cost inflation.
All these factors also led to a 25.9% year-over-year rise in
CVS' pharmacy network claims to 198.5 million. The new client
starts and the ongoing adoption of Maintenance Choice program also
drove the Mail Choice claims processed growth by 16.6% to 20.4
Revenues from CVS' Retail Pharmacy increased 9.9% to $16.0
billion with same-store sales climbing 8.4%. Pharmacy same-store
sales during the quarter rose 9.8% on the heels of benefit obtained
from Walgreen's loss of the Express Scripts contract effective
Front-end same-store sales spiked 5.3% with 120 basis points
(bps) increase due to the extra day of the leap year. Pharmacy
same-store sales witnessed a respective 50 bps and 75 bps upside
attributable to one extra day of operation in the quarter and an
extra day for 2012 being a leap year.
Additionally, when 90-day scripts are counted as one script,
pharmacy same-store prescription volumes rose 7.2%. Converting
90-day scripts into 3 scripts, same-store prescription volumes
increased 9.2% year over year. Pharmacy same-store sales witnessed
a 305 bps drop due to weak flu season, partially offset by the
early arrival of the allergy season.
The generic dispensing rate in the quarter increased 270 bps to
76.5% in Pharmacy Services segment and 290 bps to 78.1% in Retail
Cost of revenues during the quarter increased 22.6% year over
year to $25.7 million. This contributed to 185 bps contraction in
gross margin to 16.6%. Operating margin declined 50 bps to
CVS exited the first quarter with cash and cash equivalents of
$2.2 billion, compared to $1.42 billion at the end of fiscal 2011.
The company generated $2.4 billion in free cash in the quarter.
During the first quarter, CVS opened 32 new retail drugstores,
closed 7 retail drugstore and 1 onsite pharmacy. Additionally, the
company relocated 40 retail drugstores. At the end of the quarter,
CVS operated 7,428 locations, including 7,352 retail drugstores, 29
onsite pharmacies, 31 retail specialty pharmacy stores, 12
specialty mail order pharmacies and 4 mail order pharmacies in 44
states, the District of Columbia and Puerto Rico.
Based on a solid quarter, CVS raised its EPS outlook for fiscal
2012. The company now expects adjusted EPS of $3.23−$3.33 (earlier
guidance being $3.18−$3.28). The current Zacks Consensus Estimate
of $3.27 is within this range. CVS anticipates a benefit of roughly
3 cents to 4 cents per share in the second quarter of 2012 from the
Walgreen and Express Scripts contract non-renewal.
The company now expects the Retail Pharmacy's operating profit
to increase by 10.5%-12.5% (8.5%-10.5%) while that of the Pharmacy
Services remained unchanged at 11%-15%. 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.
We are encouraged by the improved performance of CVS' Pharmacy
Services segment mainly on the back of significant new client wins
due to Walgreen retail contract loss. We strongly believe that the
company is well positioned to serve Express Scripts members with
access to pharmacy care and customer service.
We are also pleased with the company's increased guidance for
2012. Although concerns linger given the margin pressure felt by
the company, we are confident about CVS' longer-term potential,
based on its retail execution, deployment potential and the strong
2012 generics cycle.
Moreover, we believe the healthcare reform will open up new
opportunities for the company. However, the recent merger between
Express Script and Medco is expected to intensify competition in
the Pharmacy Services segment.
CVS currently retains a short-term Zacks #2 Rank (Buy). Over the
long term, we have a Neutral recommendation in the stock.
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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