By Neil Saunders
CVS kicks off its new fiscal year with a positive set of numbers, boosted in part by the addition of the pharmacies and clinics of Target Corp., which the group integrated back in December. However, underlying comparable sales in the retail pharmacy segment also increased by a relatively robust 4.2%—something aided by the addition of an extra trading day due to the leap year.
Behind these solid numbers, the front-of-house retail part of CVS’s business continues to underperform. Certainly the 0.7% uplift in front-of-store comparable sales is better than the shrink that has been witnessed over previous quarters. But when set against a weak prior-year comparative (-6.1%) and taking into account this year’s extra trading day, the outcome is not particularly impressive.
CVS’s front-of-house offer isn’t compelling. CVS does not capitalize on the strong customer traffic it generates and is losing share of the beauty and personal-care segment.
CVS has put some of the weakness down to the timing of Easter, which fell earlier this year and so did not benefit this first quarter in the same way it did in 2015. As much as this excuse sounds plausible, it does not hold much weight given that the prior quarter, which should have benefitted from the earlier Easter, saw front-of-store sales shrink by 0.5%.
CVS’s front-of-house offer isn’t compelling and is a proposition based largely around convenience rather than one that stimulates buying. As such, CVS does not capitalize on the strong customer traffic it generates and is losing share of the beauty and personal care segment.
As much as this is a lost opportunity for CVS, it is not especially problematic given the overall success of the group, especially in its pharmacy services segment where revenue grew by 20.5%. Growth in both specialty pharmacy and the number of pharmacy network claims processed boosted the figures. Meanwhile, the retail pharmacy division also saw good growth with higher underlying prescription volumes and the addition of business from the Target and Omnicare acquisitions helping to fuel revenue.
That said, the cost of the various acquisitions meant that profit growth was not quite so robust. Across the quarter,consolidated operating profit grew by a fairly slim 2%. Even when the exceptional costs of the integrations, which amounted to $61 million, and an one-off legal settlement charge are excluded, profit still only increased by 5% at operating level. While this is respectable, it is somewhat short of the headline revenue growth.
In a sense, this dragging profit growth aptly demonstrates why CVS should be making more of its front-of-house business. The company needs to sweat its assets harder if it is to provide sustained and solid bottom line growth in the same way it has done with the top line.
Neil Saunders is CEO of research group Conlumino.