CVS Caremark Flattened by Higher Costs


Earlier this month, CVS Caremark (NYS: CVS) posted flat second-quarter profits as the drug retailer benefited from increased revenue from its drug management business. Here's a look back at what you should take away from the pharmacy retailer-cum-benefits manager's second quarter.

A look at the quarter
CVS's revenue for the quarter increased 11% to $26.6 billion from last year. Revenue in the pharmacy services segment jumped more than 23% to $14.6 billion, helped by the company's long-term contract with Aetna (NYS: AET) as well as the acquisition of Universal American (NYS: UAM) Medicare prescription drug business. Revenue in its retail pharmacy segment increased a more modest 3.6%.

CVS, however, saw lower sales from its retail stores, with particular struggles in the front end of its store locations. CVS lagged behind its rivals Walgreen (NYS: WAG) and Rite Aid (NYS: RAD) in this regard, as its sales declined this quarter. Store sales have weakened as shoppers have sought to cut back by buying cheaper products, including generic drugs.

During the quarter, CVS added 41 new retail drugstores to its total of 7,266 stores. This indicates management's faith in incremental sales going forward. However, it wasn't too optimistic about economic conditions improving.

Looking at the bottom line, profits remained relatively unchanged from a year earlier as increasing commodity prices sent overall costs up sharply. This resulted in net income of $815 million compared to $821 million last year.

The Foolish bottom line
CVS revenue saw a marked improvement over the last year. However, the company narrowed its earnings guidance slightly for the year, to arrange for adjusted earnings between $2.75 and $2.81 versus $2.72 to $2.82 previously. However, new additions may play an important part now, especially since the pharmacy benefits space has become more competitive since Express Scripts (NAS: ESRX) and Medco (NYS: MHS) decided to join forces last month.

However, a couple of months ago, CVS won a minor battle over Medco. It won a three-year contract worth billions, ahead of Medco, to provide mail-order pharmacy services to over 5 million U.S. federal employees, retirees, and dependents. This deal will seriously add to CVS's top line.

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At the time thisarticle was published Shubh Datta doesn't own any shares in the companies mentioned above. The Motley Fool owns shares of MedcoHealth Solutions. Motley Fool newsletter services have recommended buying shares of MedcoHealth Solutions. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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