CVS second-quarter profit up during rivals' rift

Tue Aug 7, 2012 11:47am EDT

(Reuters) - CVS Caremark Corp (CVS.N) posted higher quarterly profit and raised its forecast for the year as it works to keep customers who switched to its drugstores during an impasse between main drugstore rival Walgreen and pharmacy benefits manager competitor Express Scripts

Shares of CVS fell 2 percent to $44.01 on Tuesday as investors tried to discern how much of a lift CVS will continue to see now that Walgreen Co (WAG.N), and Express Scripts Holding Co (ESRX.O).have patched up their relationship.

At the same time, CVS is seeing greater pressure from the introduction of generic versions of popular drugs such as Lipitor, which cuts into revenue though it does boost profits.

A disagreement over contract terms led Walgreen to stop filling prescriptions for Express Scripts patients at the beginning of 2012. After resolving their dispute in July, Walgreen will start working with Express Scripts again, as of September 15.

CVS, the No. 2 U.S. drugstore chain behind Walgreen, was one of the biggest beneficiaries during the rift, gaining customers who previously filled prescriptions at Walgreen. CVS said in the fourth quarter it expected to retain at least 50 percent of the prescription business gained during the impasse.

"We've had the better part of nine months to introduce those new customers to the CVS pharmacy brand," Chief Executive Larry Merlo told Reuters.

CVS, which has more than 7,380 drugstores, is increasing its marketing push to work on keeping those customers. That spending is already factored into the company's outlook, Merlo said.

"We think CVS is going to be able to keep more of their customers than even the company has guided to," said Judson Clark, a health care analyst for Edward Jones, who has "buy" ratings on CVS and Express Scripts and a "hold" on Walgreen.

"Traditionally, pharmacy customers are very sticky. They're very hard to lose but once you have lost them they are very hard to get back."

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Pharmacy benefits managers such as Express Scripts and CVS Caremark administer on behalf of employers and health plans and run mail-order pharmacies. CVS can add the ability to pick up prescriptions at its namesake drugstores.

CVS has retained a smaller percentage of its pharmacy benefits clients to date than it had a year earlier. CVS said it retained 96.3 percent of clients to date. In August 2011, it had retained 98 percent of clients.

Second-quarter profit rose to $966 million, or 75 cents per share, from $816 million, or 60 cents per share, a year earlier.

Excluding items, it earned 81 cents per share, topping the company's forecast of 78 cents to 80 cents and analysts' average target of 80 cents, according to Thomson Reuters I/B/E/S.

Revenue rose 16.3 percent to $30.71 billion, missing analysts' average expectation of $30.96 billion.

CVS now expects full-year earnings of $3.32 to $3.38 per share, excluding items, up from a May forecast of $3.23 to $3.33. The analysts' average estimate is $3.33.

Revenue rose 28.2 percent to $18.4 billion in pharmacy services and was up 6.9 percent to $15.8 billion in the retail unit.

Sales at stores open at least a year increased 5.6 percent, in line with the company's forecast of a rise of 5 percent to 6 percent. Pharmacy same-store sales were up 7.2 percent, as Walgreen did not fill Express Scripts prescriptions during the quarter. CVS same-store sales of general merchandise increased 2.3 percent.

Visits to stores and the average amount spent on general merchandise rose from a year ago, CEO Merlo said.

By comparison, Walgreen's same-store sales dropped 6.6 percent and traffic in its stores fell 2.6 percent during its fiscal third quarter, which ended in May.

For the current third quarter, CVS forecast earnings of 81 cents to 83 cents per share, excluding items, while analysts' were looking for 83 cents.

CVS said same-store sales should rise 2.5 percent to 3.5 percent this quarter and 4 percent to 4.75 percent this year.

(Reporting by Jessica Wohl in Chicago; Editing by Lisa Von Ahn, Maureen Bavdek and Jeffrey Benkoe)

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