CVS Profit Rises, But Sales Miss Estimates

CVS Caremark posted higher second-quarter earnings on Thursday, but its shares fell as revenue came in lower than expected and the company trimmed the top end of its 2008 same-store sales outlook.

However, CVS, one of the largest U.S. drugstore chains, maintained its 2008 profit outlook. It sees stronger revenue from its drugstore business in the second half of the year.

"Our assumption on the economy is it's not going to get any better, and it's not going to get a lot worse," Chief Financial Officer David Rickard told analysts on a conference call, adding that business in July was strong.

CVS Store
CVS Store

CVS shares were down nearly 3 percent after falling more than 5 percent.

Net earnings available to common shareholders rose 7.1 percent to $771.2 million, or 53 cents a share, from $720.1 million, or 47 cents a share, a year earlier.

Excluding one-time items, but including amortization of intangible assets, CVS earned 56 cents a share, matching what analysts polled by Reuters Estimates had expected.

Revenue rose 2.1 percent to $21.14 billion, below the almost $21.4 billion analysts had expected. In May, CVS had forecast revenue growth in the range of 3 percent to 5 percent.

The Woonsocket, Rhode Island-based company was formed when drugstore operator CVS acquired pharmacy benefits manager Caremark in March 2007.

In recent years, CVS and rival Walgreen have looked to reap more of the increasing amount of money spent on health care by expanding beyond the traditional drugstore business.

That expansion into a wider array of health-care operations has helped mitigate slowing growth of drugstore sales as the U.S. economy weakens.

At CVS, revenue in the pharmacy services segment increased 1 percent to $10.7 billion.

Revenue in the retail drugstore segment rose 4.6 percent to $11.8 billion. That was short of the company's May forecast of 5 percent to 7 percent growth.

Sales at drugstores open at least a year rose 3.1 percent, with pharmacy same-store sales up 3.7 percent.

CVS said recent generic drug introductions had hurt the pharmacy same-store sales by about 280 basis points. Generic drugs cost less, but are more profitable for drugstores.

Same-store sales of general merchandise, or front-end sales, rose 1.8 percent as an earlier Easter holiday shifted more sales into March.

CVS cut the top end of its 2008 forecast for same-store sales growth in its drugstore segment to 6 percent from 7 percent, while keeping the low end at 4 percent.

"The weak economy is having an effect on CVS' front store sales," Wachovia analyst Matt Perry said a research note, but he added that he believed the company's full-year earnings outlook was still achievable. He has an "outperform" rating on the stock.

Rickard said CVS was maintaining its May outlook for 2008 adjusted earnings from continuing operations, saying it still expects a range of $2.44 to $2.50 a share.

The company also said it still expected overall revenue to increase 13 percent to 16 percent in 2008, with growth of 7 percent to 10 percent for the drugstore business.

"Despite the economy, we continue to grow and take a greater share of wallet," Rickard said, citing share gains in CVS' over-the-counter, beauty, private-label and digital photo businesses.

For the third quarter, Rickard said CVS expected adjusted earnings of 58 cents to 61 cents a share. It sees total revenue rising 3 percent to 5 percent and drugstore sales up 5 percent to 7 percent.

He also said the third quarter was off to a good start as same-store sales in July rose 4.2 percent, with increases of 3.5 percent at the front end and 4.5 percent in the pharmacy business.

CVS shares fell as low as $36.54, and were still off $1.11, or 2.9 percent, at $37.46 in midday New York Stock Exchange trade.