CVS Retail Operations Power Forward

People are getting older, they’re getting the flu, they’re worried about money, and that all spelled better results for CVS in the third quarter.

One of the ironies of being in the drug store business is that providing the kind of services shoppers require means making money from their problems. Sometimes it’s just a matter of not having time to get to the supermarket, but, often, the problem is more serious. And folks have problems these days.

CVS (CVS) has a few, too, as its Caremark subsidiary, which works with insurers as a pharmacy benefits manager, hasn’t been doing well. Yet the general merchandise side has been stronger even if much of retailing — led by Walmart (WMT) and Kroger (KR) — is after its business. Indeed, a whole range mass-market retailers are expanding their operations in pharmacy and the kind of general merchandise drug chains sell.

CVS third quarter earnings per share beat analyst estimates,though. It has increased pharmacy comparable store sales even with the added challenge of selling more low-priced generic prescription drugs. In addition, the company has expanded its store base to become a conspicuous presence in more communities. It also has rolled out a range of products and services that are standing it in good stead.

In a conference call earlier this month, as transcribed by SeekingAlpha, Thomas Ryan, chairman, president and CEO, noted that comparable store sales:

increased 5.7 percent in the third quarter…when we came into this year, we told you we expected to see comps accelerate, pharmacy comps accelerate in the second half, and we are seeing it — pharmacy comps — increase a solid eight percent, better than the last quarter, and, in fact, the highest level we have seen in two years. I guess almost close to twice the industry average. And that occurred even as our generic dispensing rate surpassed 70 percent on the retail side. Our pharmacy comps were negatively impacted by about 380 basis points due to recent generic introductions and further generic expansion.

The pharmacy comparable store sales figure – which comes from stores open for at least a year – doesn’t include flu shots, Ryan said, although some CVS competitors do fold them into results for the prescription drug business.

The flu kept CVS MinuteClinics – which offer services for minor health problems such as a sprained ankle or help with the bug that’s going around — busy even beyond flu shots. Ryan brought that up in the conference call:

Let me touch on MinuteClinic, which has now surpassed five million patient visits since its inception. We opened up eight new clinics during the quarter and now we have 565 clinics across 25 states. About 100 of those operate seasonally. In the third quarter, we saw better than expected growth in the clinics, and this growth was really excluding the flu shot. So we had traffic up 77 percent in MinuteClinic and that’s not counting the flu shots. These are just people coming for acute sick visits.

Even the tougher part of the business showed improvement. Sales in general merchandise, or front store in drug store parlance, saw a modest gain despite Walmart’s launch of an expanded personal care product assortment online. The competitive environment keeps getting tougher for CVS as more retailers eye its key businesses, and this on top of healthy competition from Walgreen (WAG) and Rite Aide (RAD). Even Bed, Bath & Beyond (BBBY) is in on the act, as the home specialist continues expansion of its Harmon’s health and beauty care operation both as stand-alone stores and as departments in its namesake locations.

Ryan said:

Front store comps increased just under one percent with more customers seeking out promotional prices and private-label products in the quarter. Consumers, I think, continue to be conservative with their spending and they opt for higher value, certainly and are looking for lower price points. In fact, growth in private label sales during the quarter more than doubled the rate of other sales in the front store. Obviously this is good for us from a margin standpoint.

Private label now represents about 17 percent of merchandise sales at CVS stores, up about one percentage point over last year. The company has recently added about 250 private label products and plans to finish the year with over 900 new store brand products. Even as consumers look to save cash in an uncertain economy, CVS is giving them a break. As with generic drugs, store brands may drag a bit on top-end sales as private label savings can be significant in the product categories drug chains carry. They are more profitable, though, and popular with worried consumers, which all works in the company’s favor.