CVS Caremark Corp (NYSE:CVS) released great results on May 1, 2008. The drug store chain saw profits surge 83% despite a slow economic environment. The results met Wall Street's expectations and showed that the company is on solid ground moving forward. Economic concerns are not affecting CVS because the essential consumer staples it sells is still flying off shelves.
Growing With Care
CVS reported a net income of $745 million (52 cents per share) for its first quarter, up 83% from the $405 million (45 cents per share) in the same quarter of 2007. The results at the core were quite impressive, despite the significant increase in shares outstanding. CVS finished its acquisition of Caremark just over a year ago, and excluding deal related expenses the company earned 55 cents per share, which was in line with analyst expectations. (To learn more about shares outstanding, read The Basics Of Outstanding Shares And The Float.)
Net revenue rose 62% to $21.3 billion from $13.2 billion in 2007. This number came in slightly below analyst estimates of $21.36 billion. Same store sales in the company's retail/pharmacy stores rose 3.9% for the quarter, with front-end sales leading the way. Same store sales of retail products in the front of the stores rose 4.3%, and back-end pharmacy sales rose 3.7%. The better retail numbers were helped by an early Easter holiday, while the pharmacy numbers were hurt by the recent introduction of many generics. Still both numbers are quite strong, and show that the company has been doing a good job of attracting people to its stores. The same store sales show that sales are good despite the slow economic environment. During the quarter the company added forty-one stores and closed nineteen for a net addition of twenty-two stores. Recent numbers from the company show that CVS now operates 6,267 retail/pharmacy stores, fifty-six specialty pharmacy stores, nineteen specialty mail-order pharmacies and seven mail-order pharmacies in the U.S. (For further reading, see Analyzing Retail Stocks.)
Margins Sink
Gross profit margins fell sharply to 20.1% from 25%. Retail gross margins grew to 29.6% from 27.6%, indicating that the decline in total gross margins is arising from the company selling more generic drugs in its pharmacies. This is worrisome. The company is now less profitable than it was a year ago, however, this was likely due to a large rise in generic switches recently, and should not deteriorate margins further going forward.
Solid Ground
The report from CVS indicates that it is on solid ground to continue growing, despite a near stagnant U.S. economy. First quarter gross domestic product (GDP) numbers indicate a second consecutive quarter of 0.6% growth, showing the economy is at a halt in terms of growth.
Along with competitors like Walgreen's (NYSE:WAG) and Rite Aid (NYSE:RAD), it distributes consumer staples that everyone needs. People still need their drugs even in slower times, and everyday items like toothpaste and diapers. I can even see CVS benefiting somewhat from the slowdown as customers may trade down to generic CVS brand products instead of pricier consumer staples from the likes of Johnson & Johnson (NYSE:JNJ) and Procter & Gamble (NYSE:PG). Although I like those companies and believe they will continue to perform as well. Overall I think the numbers from CVS are strong, and the company has shown it can perform in a weak economy.
The Bottom Line
CVS reported a great quarter with 83% growth in net profit. The company reported impressive growth in same store sales, in the face of a slow U.S. economy. The company sells many products that people need no matter what the condition of the economy, and I think it is positioned to continue to do well.
For further reading, see Using Consumer Spending As A Market Indicator.
