CVS Caremark cuts sales view, shares fall

CVS Caremark cuts sales view, shares fall

Stock Market Predictions

CHICAGO (Global Markets) - CVS Caremark Corp (CVS.N) trimmed its 2011 sales forecast and narrowed its profit target, sending its shares down more than 3 percent on Thursday even though it posted a better-than-expected quarterly profit.

While the company's pharmacy benefits management business is showing signs of improvement after some trouble in recent years, CVS is still feeling the impact of a weak economy.

Shoppers are opting to buy less expensive goods, including generic drugs. CVS said visits to its stores in the second quarter were flat versus a year earlier.

"If I think about the outlook for the remainder of the year, I personally don't see the economy changing dramatically," Chief Financial Officer Dave Denton said in an interview. "I think the consumer is going to remain cautious."

CVS, like other drugstores and pharmacy benefits managers, is selling more generic drugs. That move crimps revenue because generic drugs are less expensive than their branded counterparts. However, generics are more profitable.

Denton declined to say how much of a lift generics provide, although he called it substantial.

CVS now sees 2011 revenue up 10.5 percent to 11.5 percent, down from a prior forecast of 11 percent to 13 percent.

CVS hopes to benefit from uncertainty as two rival PBMs, Express Scripts Inc (ESRX.O) and Medco Health Solutions Inc (MHS.N), work on a merger and Express Scripts deals with the potential loss of its business with Walgreen Co (WAG.N).

Two large pharmacy groups said on Thursday they sent a letter to U.S. Federal Trade Commission opposing Express Scripts' plan to buy Medco. CVS would not say whether it specifically is lobbying against the proposed deal.

CVS shares were down 3.6 percent at $34.90 in afternoon trading amid a broad market sell-off. The shares of Walgreen, the largest U.S. drugstore chain, fell 0.7 percent to $37.86.

WEAKER DRUGSTORE SALES GROWTH

For its drugstore unit, which operates more than 7,200 stores and accounts for a little more than half of total revenue, CVS now expects sales at stores open at least a year to rise 1.5 percent to 2.5 percent, down from a May forecast of 2.5 percent to 4.5 percent. Net drugstore revenue is now expected to rise 3 percent to 4 percent, down from a May forecast of 4 percent to 6 percent.

Sales at stores open at least a year, or same-store sales, rose 2 percent in the second quarter, but fell short of some estimates. Analysts' consensus forecast was 3.1 percent, according to Bernstein analyst Helene Wolk.

Sales at stores open at least a year across a variety of chains, excluding CVS, rose 4.4 percent in July.

PROFIT TOPS EXPECTATIONS

Adjusted earnings from continuing operations were flat at 65 cents per share, topping analysts' average forecast by a penny, according to Thomson Global Markets I/B/E/S.

Net income attributable to CVS Caremark was $816 million, or 60 cents per share, compared with $821 million, or 60 cents per share, a year earlier.

Revenue rose 10.9 percent to $26.63 billion, just short of the $26.77 billion expected by analysts.

Retail revenue rose 3.6 percent to $14.8 billion.

Revenue in the pharmacy services business jumped 23.2 percent to $14.6 billion, due in part to the addition of a previously announced major contract with Aetna Inc (AET.N).

CVS now expects pharmacy services revenue to rise 23 percent to 24 percent this year, compared with a prior forecast of 23 percent to 26 percent. The unit's operating profit is now expected to fall 7 percent to 9 percent, compared with a prior target of a 5 percent to 9 percent drop.

CVS expects to earn $2.75 to $2.81 per share from continuing operations this year, versus its prior forecast of $2.72 to $2.82. The average forecast of analysts is $2.78.

CVS forecast third-quarter adjusted earnings of 66 cents to 68 cents per share. Analysts were looking for 68 cents.

The company, formed through CVS's 2007 acquisition of Caremark, continues to cooperate with the FTC in its ongoing investigation into the combined company's business practices, Denton said. The probe began in August 2009.

(Reporting by Jessica Wohl; editing by Lisa Von Ahn, Gerald E. McCormick and Andre Grenon)

Read More

Walgreen sales hit by exit from Express Scripts

Walgreen sales hit by exit from Express Scripts

Stock Market Predictions

(Global Markets) - Walgreen Co (WAG.N) is being hit by its withdrawal from the Express Scripts Inc (ESRX.O) pharmacy network and by a much-weaker-than-expected flu season, leading it to temper its expectations for the number of prescriptions it will fill this year.

Walgreen said on Friday that it now expects prescriptions filled in fiscal 2012 to be around the low end of its previous forecast of 97 percent to 99 percent of the prescriptions it filled last year.

Walgreen said January sales at stores open at least a year, or same-store sales, fell 4.6 percent as it lost business following its decision to walk away from Express Scripts after failing to come to terms on a new contract with the pharmacy benefits manager.

Analysts, on average, anticipated that sales would fall only 2.7 percent, according to Thomson Global Markets data.

Walgreen, the largest U.S. drugstore chain, stopped filling prescriptions for patients in the Express Scripts network on December 31, 2011. Chains such as CVS Caremark Corp (CVS.N) and Rite Aid Corp (RAD.N) have been advertising to woo customers who used to fill their prescriptions at Walgreen.

CVS, in particular, appears to be "the clear winner" due to the fallout between Walgreen and Express Scripts, said Jefferies & Company analyst Scott Mushkin, who has a "buy" rating on CVS and a "hold" rating on Walgreen.

CVS stands to benefit both in its stores and in its Caremark pharmacy benefits management business, analysts say.

Pharmacy same-store sales fell 7.9 percent in January, Walgreen said. Express Scripts prescriptions accounted for 12.4 percent of Walgreen prescriptions in January 2011.

"While it's no surprise (Express Scripts) had a large impact, underlying trends were also disappointing," said Credit Suisse analyst Edward Kelly.

He said that Walgreen's tone in its statement also suggested that the two parties are not close to reaching a resolution.

Walgreen is moving ahead with relationships with large and small employers, health systems, physician groups and other pharmacy benefits managers.

"With January now behind us, we are moving forward with relationships with large and small employers, health systems, physician groups and other PBMs who value Walgreen's ability to help lower overall healthcare costs," Kermit Crawford, Walgreen's president of pharmacy, health and wellness services and solutions, said in a statement.

With such relationships and once it is past the weak flu season, Walgreen expects the number of comparable prescriptions filled relative to January's result to improve in the coming months, he added.

Walgreen has administered 5.5 million flu shots so far this season, down from 6.3 million at the same time last year.

Shares of Walgreen, which operates 7,830 U.S. drugstores, were down 18 cents to $33.35 in morning trading on the New York Stock Exchange.

(Reporting by Jessica Wohl in Chicago; editing by John Wallace and Mark Porter)

Read More

Analysis: Big name investors, funds bet on Rite Aid recovery

Analysis: Big name investors, funds bet on Rite Aid recovery

Stock Market Predictions

NEW YORK (Global Markets) - Rite Aid Corp (RAD.N), a perennial laggard U.S. drugstore chain, is enjoying something of a comeback, enticing some big-name hedge funds to buy shares on the bet that a turnaround will send them rising.

Debt-saddled, money-losing Rite Aid is the third-largest U.S. drugstore chain, with nearly 4,700 stores. After years of declines, same-store sales have risen in its three most recent quarters. On Thursday, Rite Aid said second-quarter same-store sales were up 2.2 percent.

The improvement, however modest, is fueling speculation that Rite Aid shares, which have been trading for less than $1.50 for nearly a year and a half, have hit bottom.

New initiatives, like a customer loyalty program and smaller stores, are gaining traction with shoppers, and the company's CEO of 14 months, John Standley, is well regarded by investors.

Shares in Rite Aid have fallen 84 percent in roughly four years and were as low as 20 cents in 2008.

"You could see the business doing a lot better; you could see the stock doing a lot better " one large shareholder said, speaking on condition of anonymity. His fund has tripled its shares in Rite Aid in recent months.

Even a modest rise in shares could yield a big payday for investors, many of whom were bondholders who bought debt on the cheap in 2008 and have converted that into equity.

Investors that recently have taken equity in Rite Aid or added to what they already owned include: Leonard Green & Partners LP, Diamondback Capital Management, Perry Capital LLC, Standard Pacific Capital and billionaire investor George Soros, whose fund reported a small stake in May.

Canadian retailer Jean Coutu Group (PJCa.TO), Rite Aid's biggest shareholder since it sold its U.S. drugstores to Rite Aid in 2007, when Rite Aid shares were worth $6.70, said in July it would shed 10 percent of its 26.8 percent stake. Coutu also said it intends to remain the largest investor.

NOT A TAKEOVER TARGET ... YET

A major draw for investors is Rite Aid's potential as a takeover target, despite its market value of just $1 billion.

Still, Rite Aid will not be in play until it makes serious inroads into its enormous debt load.

For now, the company could keep selling or shutting some stores. In recent years, rival Walgreen Co (WAG.N) has bought more than 20 stores from Rite Aid.

Analysts say Walgreen and CVS Caremark Corp (CVS.N), the top two drugstore chains, could particularly be drawn to Rite Aid's attractive portfolio of stores in California and Pennsylvania, while Wal-Mart Stores Inc (WMT.N) could be tempted by its stores' sizes to help expand its new smaller-format business.

Rite Aid's $6 billion long-term debt has been an albatross, leading to severe liquidity crises in 2000 and 2008. The company's interest expenses of more than $500 million a year in the last two fiscal years effectively wiped out any profit.

"The biggest obstacle (to a deal) is their debt load," said a retail investment banker, who declined to be named because he was not authorized to speak to the media.

Rite Aid's debt is seen as so risky that on Thursday it cost 29 times more to protect $10 million of Rite Aid debt for five years than Walgreen debt based on credit default swap trades, according to Markit. Walgreen CDS are thinly traded.

Although Leonard Green, the private equity firm that has done a number of leveraged buyouts of retail chains, is the No. 2 investor in Rite Aid and holds a seat on its board, it is unlikely to make a bid for the company, a source close to the situation said. One reason is that Rite Aid largely leases its stores rather than owning them.

Leonard Green did not return a request for comment. Rite Aid declined to comment for this article.

In addition, Rite Aid's unionized workers would deter Wal-Mart, which has no U.S. unions, industry experts said.

Despite the debt load, a Chapter 11 bankruptcy protection filing is not considered an imminent possibility. Rite Aid has no major maturities coming due until 2014 and generates ample cash from $25 billion in annual sales.

TOUGH TURNAROUND

Rite Aid still faces a number of challenges.

It commands just 11.4 percent of the U.S. market, compared with 27.1 percent for CVS and 32 percent for Walgreen, according to IBISWorld. Its same-store sales gains have been far smaller than its profitable, deep-pocketed rivals.

Many of its stores are not very productive, and sit in undesirable locations under landlords with tough lease terms.

Last fiscal year, Rite Aid stores generated sales of about $534 per square foot, compared with $822 at CVS and $802 at Walgreen, according to data in the companies' annual reports.

"It's all about sales per square foot," said Andrew Wolf, an analyst with BB&T Capital Markets.

CVS and Walgreen have the means to invest heavily in sprucing up their stores, expanding their worksite wellness clinics and offering more fresh food.

Rite Aid, despite being handcuffed by its debt, also has managed to try new concepts, but analysts say it lags rivals.

"One of the issues Rite Aid has had for a while is that it's not a first mover in the industry," said IBISWorld healthcare analyst Sophie Snyder. Snyder believes Rite Aid's market share will hold steady but that Walgreen and CVS will keep gaining customers.

The next few years will be decisive for Rite Aid.

"We have at least four years or more of what we call runway, the time for the business to perform and rebound," the shareholder said.

(Reporting by Phil Wahba and Nadia Damouni in New York, and Jessica Hall in Philadelphia; editing by Gunna Dickson)

Read More