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How Large Is Cost of Goods Sold Expense For CVS Health?

CVS Health (NYSE:CVS) spent $146 billion in cost of goods sold (COGS) expenses in 2016, and the figure increased to $156 billion in 2018, driven by growth in revenues. As a percentage of revenue, COGS declined from 83% in 2016 to 80% in 2018. It is expected to decline to 61% in 2019, reflecting the impact of the Aetna acquisition, given Aetna primarily being a health insurance company, and Benefits & Compensation accounts for most of its expenses. As such, post acquisition, CVS Health’s COGS as % of revenue has declined, while its operating costs have increased. CVS Health’s total expenses have largely trended higher from around $172 billion in 2016 to about $195 billion in 2018. As a percentage of revenues, expenses have remained more than 95%.
Below, we take a look at the key drivers of CVS Health’s expenses and net margins. Look at our interactive dashboard analysis ~ CVS Expenses: How Does CVS Health Spend Money? ~ for more details.

Breaking Down CVS Heath’s Total Expenses In 2018:

  • Total = $195 billion
    • COGS = $156 billion
    • Operating Expenses = $34 billion
    • Provision for income taxes = $2 billion
    • Non-operating expenses = $3 billion

CVS Health’s Net Income Margin Has Declined Between 2016 And 2018, Although It Saw Significant Decline In 2018, Due To A $6.1 Billion Goodwill Impairment Charge

CVS Health’s Total Expenses Have Increased From $172 Billion In 2016 To $195 Billion In 2018

  • CVS Health’s total expenses have grown from $172 billion in 2016 to about $195 billion in 2018.
  • For 2020, we expect total expenses to be around $248 billion, which comprises of
    • 1) COGS: $156 Billion
    • 2) Operating Expenses: $86 billion
    • 3) Non-Operating Expense: $3 billion
    • 4) Income Taxes: $3 billion
  • Below, we take a look at how the company’s key expense components have trended and the key reasons for the change.

1. COGS After Increasing Over The Last Few Years Is Expected To Decline Going Forward

  • Cost of Goods Sold (COGS) have increased from $146.5 billion in 2016 to $156.4 billion in 2018.
  • However, it could decline to $154.4 billion in 2019.
  • This can be attributed to the Aetna acquisition, which boosted the company’s revenues at a higher rate than its COGS.

2. Operating Costs Are On A Rise

  • Operating Costs have increased from $20.6 billion in 2016 to $34.1 billion in 2018 driven by:
  • (A) $4.4 billion increase in benefit costs,
  • (B) $6.1 billion increase in goodwill impairments, and
  • (C) $2.9 billion increase in operating expenses.
  • The overall operating costs are expected to see a sharp growth in 2019, reflecting the impact of the Aetna acquisition.

(A) Benefit Costs Grew From $2.2 Billion In 2016 To $6.6 Billion In 2018

  • This was driven by the Aetna Acquisition in Q4 2018.
  • As a % of revenues, Benefit Costs grew from 1.2% to 3.4% over the same period.
  • The figure is expected to surge in 2019, reflecting the full impact of the Aetna acquisition.

(B) Operating Expenses Grew From $18.4 Billion In 2016 To $21.4 Billion In 2018

  • This was driven by the Aetna Acquisition in Q4 2018.
  • As a % of revenues, Operating Expenses grew from 10.4% to 11.5% over the same period.
  • The figure is expected to surge in 2019, reflecting the full impact of the Aetna acquisition.

(C) Goodwill Impairment Was Close To Zero In 2016 And 2017, But Jumped Sharply In 2018

  • This was driven by one-time charge associated with the company’s retail/long term care unit.
  • As a % of revenues, Goodwill Impairments grew from 0% to 3.2% over the same period.
  • The figure is expected to be zero going forward.

3. CVS Health’s Non-Operating Expenses On A Rise

  • CVS Health’s non-operating expenses primarily includes interest & other expenses.
  • It grew from $1.7 billion in 2016 to $2.6 billion in 2018, driven by higher debt.
  • As a % of average debt, interest expenses grew from 4.2% to 5.6% over the same period.

4. CVS Health’s Income Tax Expense Has Fluctuated In Recent Years

  • This was driven by the tax cut and jobs act.
  • As a % of revenues, Effective Tax Rate grew from 38.4% to 142.4% between 2016 and 2018.
  • The surge in 2018 can be attributed to one-time goodwill impairment charge of $6.1 billion.
  • The figure is expected to be under 30% going forward.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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