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CVS Profit, Sales Climb as it Goes After Caremark
February 1, 2007 · Reuters
CVS Corp. posted a 2.7 percent rise in quarterly profit on Thursday, driven by greater use of profitable generic drugs, and it issued the latest salvo in a fight to buy Caremark Rx Inc., whose shareholders are also being courted by Express Scripts Inc.
The No. 2 drugstore chain also said that growth in sales at stores open at least a year may fall short of increases posted in 2006, and that this quarter's earnings could miss Wall Street's expectations. CVS shares slipped in midday trading.
CVS, which competes with larger rival Walgreen Co. has grown at a rapid clip by acquiring stores and businesses such as in-store clinics and opening new stores.
Now CVS hopes to beef up its pharmacy benefits management business, which administers drug benefits and a mail-order pharmacy for employers and health plans, by buying Caremark. CVS and Express Scripts have been touting their offers for weeks, each saying that it can provide a better opportunity for Caremark shareholders.
Express Scripts called a deal with CVS "flawed and value-destroying" in a letter to Caremark holders on Thursday.
CVS Chairman, President and Chief Executive Tom Ryan fired back during a conference call, saying that the Express Scripts is using "smoke and mirrors" to make its deal appear better.
"Express Scripts is asking Caremark shareholders to play a dangerous game of jeopardy with their company's future," Ryan said.
Based on Wednesday's closing stock prices, CVS' stock offer is worth nearly $24.51 billion, while Express Scripts' cash-and-stock offer is valued at $25.67 billion. CVS also plans to pay a special $2-per-share dividend to Caremark shareholders. Express Scripts' bid was initially much higher than the CVS offer, but that range has narrowed.
MORE STORES, CLINICS PLANNED
Fourth-quarter profit rose to $417.2 million, or 49 cents per share, from $406.4 million, or 48 cents per share, a year earlier. CVS said the impact of the June acquisition of 701 Sav-on and Osco stores trimmed earnings by about 5 cents per share.
The company also said that sales at stores open at least a year rose 8.6 percent in January. Total January sales soared 24.2 percent to $3.7 billion, benefiting from the addition of the new stores.
Pharmacy same-store sales rose 8.7 percent in January, while sales of "front-end," or general merchandise, rose 8.2 percent.
By comparison, smaller rival Rite Aid Corp. posted a 4.5 percent rise in January same-store sales on Thursday, with total sales up 4.7 percent to $1.32 billion.
CVS forecast 2007 same-store sales growth of 6 percent to 8 percent, after posting an 8.2 percent rise for 2006.
The company expects to earn 44 cents to 46 cents per share this quarter, while analysts expect a profit of 47 cents per share, according to Reuters Estimates.
For the full year, CVS forecast earnings of $1.87 to $1.93 per share, while analysts' average estimate is $1.88.
But CVS's forecast includes close to 5 cents per share in costs related to its plan to invest in its Minute Clinic business, which runs small clinics in CVS stores and elsewhere. The company plans to open close to 300 of the clinics this year. CVS also said its forecasts exclude Caremark.
CVS, based in Woonsocket, Rhode Island, previously reported that quarterly sales jumped 24 percent to $12.1 billion, with sales at stores open more than one year up 8.7 percent.
Sales rose despite worries late last year that Wal-Mart Stores Inc.'s $4 generic drug plan would pressure the drugstore industry.
While generic medicines are cheaper, they are more profitable for pharmacies since the prices of branded drugs are tightly controlled by the major drug companies that manufacture and sell them.
Shares of CVS were down 26 cents, or less than 1 percent, at $33.39 in midday trading.
Shares of CVS rose 17 percent during 2006, outpacing Walgreen, whose shares rose 3.7 percent. Walgreen has higher revenue than CVS, but CVS has about 600 more stores.