The drug store industry is changing, and while it’s not all for the best, profitability is likely to improve for one simple reason.
CVS continues to impress
While Walgreen Company (NYSE:WAG) and Rite Aid Corporation (NYSE:RAD) saw revenues decline in 2012, CVS Caremark Corporation (NYSE:CVS) didn’t skip a beat. Here’s revenue (in millions) for CVS over the past five years:
- 2008: $87,472
- 2009: $98,729
- 2010: $96,413
- 2011: $107,100
- 2012: $123,133
In the second quarter, CVS Caremark Corporation (NYSE:CVS) saw net revenue increase 1.7% year over year. This had a lot to do with volume growth in the Pharmacy Services segment (2%). The Pharmacy Services segment caters to employers, insurance companies, unions, government employee groups, and more. Based on industry trends, it was expected that CVS Caremark Corporation (NYSE:CVS) would show a boost in earnings, and that held true, with CVS reporting adjusted EPS of $0.97, a 19.5% jump year over year.
The Retail Pharmacy also performed well, with revenue improving 1.9%. Prescription volumes moved higher by 0.4%. Also as expected, pharmacy comps improved (0.4%), whereas front-end sales dropped (0.4%). The front-end simply refers to the front of the store, where everyday products are sold, including snacks, beauty products, books, and toys. The drug stores haven’t been performing well in this area due to increased competition from other drug stores, dollar stores, and other discount retailers.
A forward-looking tailwind is that baby boomers are beginning to retire in droves. As this massive generation ages, they will need more drugs to care for various conditions, which bodes well for CVS Caremark Corporation (NYSE:CVS) and its peers.
Increased competition (for the most part)
CVS has managed to buck the trend of declining revenue for drug stores thanks to pharmacy volume growth and increased drug prices. Walgreen Company (NYSE:WAG) would likely be right in line with CVS if it hadn’t lost so many customers after deciding to cut ties with Express Scripts. However, Walgreen Company (NYSE:WAG) is back on board with Express Scripts by offering its Smart90 Walgreen Company (NYSE:WAG), which will allow clients to pick up 90-day prescription drug supplies at Walgreen Company (NYSE:WAG) locations. Walgreen had already been getting some of its customers back, and this move should further boost momentum.
CVS Caremark Corporation (NYSE:CVS) and Walgreen have mostly traded together throughout the years, with Walgreen Company (NYSE:WAG) being the stronger all-time performer. However, CVS has outperformed Walgreen over the past three years, with the stock appreciating 107%, versus 86% for Walgreen Company (NYSE:WAG). In most market environments, these would be stupendous numbers, but in today’s market, or since March of 2009, it’s nothing special, especially considering another company has outperformed CVS Caremark Corporation (NYSE:CVS) and Walgreen Company (NYSE:WAG) over the past three years. The much smaller Rite Aid Corporation (NYSE:RAD) has seen stock appreciation of 200% over a three-year time frame.
