UPDATE 3-CVS brightens profit view despite sales pressure

* Q1 adjusted EPS 60 cents vs Wall St view 58 cents

* Revenue $23.76 bln vs Street view $24.12 bln

* Raises low end of 2010 EPS view, sees revenue below St

* Sees Q2 adjusted shr $0.66-$0.68 vs Street view $0.68

* Shares decline 1 percent (Adds company and analyst comments, byline; updates stock)

By Jessica Wohl

CHICAGO, May 4 (Reuters) - CVS Caremark Corp (CVS.N) posted a bigger-than-expected rise in quarterly profit as it dispensed more profitable generic drugs, but said some weak sales at its drugstores would weigh on results and its shares slipped.

CVS, which runs its namesake retail chain and a pharmacy benefits management unit, said it remains confident about the rest of 2010 and raised the low end of its earnings forecast.

Still, it said the mild cold and flu season, as well as severe winter storms that kept shoppers away in areas such as the mid-Atlantic, crimped first-quarter revenue and will pressure operating profit at the 7,063-store chain throughout 2010.

CVS has been working on turning around its PBM, which administers prescription drug benefits for employers and health plans and operates a large mail-order pharmacy, since warning in November that it lost out on about $4.8 billion of business heading into 2010. That prompted a sharp 24 percent sell-off in its shares. [ID:nN05502370]

The PBM appears to be recovering, with gains so far and no significant terminations in what Chairman and Chief Executive Tom Ryan called a "very encouraging" start to the 2011 selling season.

"Of course they didn't quantify that, but that's a lot better than a loss of $4.8 billion," said Edward Jones healthcare analyst Steve Shubitz. "It's still early in the 2011 selling season. They said a lot of positive things, though."

First-quarter profit rose to $771 million, or 55 cents per share, from $738 million, or 50 cents per share a year before.

Adjusted earnings per share from continuing operations climbed to 60 cents from 55 cents. Analysts had expected 58 cents per share, according to Thomson Reuters I/B/E/S, and the company had forecast a profit of 57 to 59 cents per share.

CVS said its earnings per share topped its own expectations in part because it ramped up stock buybacks during the quarter. It still plans to complete buybacks under its $2 billion authorization during this quarter.

Revenue climbed 1.6 percent to $23.76 billion, falling short of analysts' forecast of $24.12 billion.

CVS said it now expects 2010 adjusted earnings per share from continuing operations of $2.77 to $2.84. In February, its forecast was $2.74 to $2.84. Analysts' average forecast was $2.79 per share.

Shares of CVS were down 1 percent at $36.69 in late morning trading. They have recovered all of November's losses.

CVS trades at a slight price-to-earnings discount to Walgreen Co (WAG.N), the No. 1 U.S. drugstore chain with nearly 7,500 stores, and a significant discount to fellow PBMs Express Scripts Inc (ESRX.O) and Medco Health Solutions Inc MHS.N.

"If they can stabilize the PBM and get it growing again, get its fair share of the market growth, the stock could do really well," Shubitz said.

SMALL STORE CHANGES

CVS said it is working on some store updates, such as trying to improve margins through talks with suppliers, selling more food and better tailoring stores to their locations.

It now expects 2010 retail operating profit growth of 12 to 15 percent versus a prior target of 13 to 16 percent. Retail revenue is expected to rise 5 to 7 percent with sales at stores open at least a year up 3.5 to 5.5 percent -- slightly below earlier forecasts of 5.5 to 7.5 percent and 4 to 6 percent, respectively.

The company still expects PBM operating profit to fall 10 to 12 percent this year, with revenue down 4 to 6 percent.

Total revenue is now expected to be flat to down 2 percent this year instead of roughly flat to up 2 percent.

For the current second quarter, CVS expects revenue to decline 2 to 4 percent, a bit more than analysts had anticipated. It expects retail revenue to climb 4.5 to 6.5 percent and sales at drugstores open at least a year to rise 3 to 5 percent.

BY THE NUMBERS

Drugstore revenue rose 3.6 percent to $14 billion in the first quarter, while same-store sales rose 2.3 percent, below the company's goal of 3 to 5 percent. Pharmacy same-store sales rose 3.7 percent and same-store sales of general merchandise fell 0.7 percent.

Pharmacy services revenue rose 2.6 percent to $11.8 billion. But the PBM processed 10.3 percent fewer retail network claims since it lost a few large client contracts as of January and now covers fewer Medicare Part D patients.

The use of generic drugs rose about 2.9 percentage points to 72.1 percent in the stores and about 2.7 percentage points to 70.4 percent in the pharmacy services unit. (Reporting by Jessica Wohl, editing by Gerald E. McCormick and Maureen Bavdek)