CVS has ended its fiscal year with a solid set of numbers. While there is an ongoing moderation in growth, the company will be more than satisfied with an overall revenue gain of 9.4 per cent and an operating income uplift of 62.3 per cent.
CVS also produced a 77.5 per cent increase in net income over the period. However, full-year net income is down by 47.3 per cent thanks, in large part, to the hefty opioid settlement which was recognized in last quarter’s numbers.
On the retail side of the business, pharmacy sales increased by 4 per cent. This is a reasonable level of growth, especially as it comes off the back of a strong increase last year when Covid testing and vaccinations were helping to drive the numbers. The impact of Covid services is now much more muted and the dividend of the pandemic has largely faded, as such growth rates are returning to more modest levels. Fortunately, CVS has been spared coming down to earth with a bump due to an elevated cold and flu season which helped to drive sales of related medicines and sundries.
Where the slowdown in retail pharmacy is most acutely felt is on the bottom line. Here operating income for the segment fell by 25.1 per cent compared to the prior year. A lot of this is down to the drying up of lucrative Covid-related services and some increases in operational costs and investments. What’s clear is that the retail side of the business, while still important for CVS, is going to struggle to generate superior growth over the year ahead.
Front-of-store sales, which exclude prescription drugs and pharmacy services, rose by a very modest 1.5 per cent during the quarter – the lowest rate of growth of this fiscal year. Admittedly, comparable front-of-store sales increased by a more robust 3.1 per cent, but this is still a long way below the prevailing rate of inflation for most of the products that are sold. Overall volumes are stable – helped along by the demand for cold and flu products – but they are weaker than the revenue growth numbers suggest; and in some categories, there have been volume declines.
Within the front-of-store business, we see two dynamics currently playing out. The first is the weakening demand for Covid vaccinations and testing reducing footfall to stores which, in turn, has a knock-on impact on purchasing. This was, in our view, always inevitable as Covid provided something of an artificial boost to the whole retail business.
The second dynamic is a slight deterioration in the number of shoppers using CVS for general merchandise simply because they are cutting back on purchases or they are using other stores to save money. Unfortunately, like most drugstores, CVS does not have the best reputation when it comes to price or value for money – something that does not play particularly well at the present time.
It also must be said that due to a lack of effort on the shop floor, allied with a general lack of imagination, CVS misses out on the gains from some high-growth categories such as beauty. While there has been some effort to bring more interesting DTC brands into stores, the impact remains lackluster.
While retail is somewhat sluggish, CVS can’t be accused of standing still in other areas. Hot on the heels of its Signify Health acquisition, it has just announced a deal to buy Oak Street Health. Both new additions will help CVS bolster its presence in primary care and allow it to generate much more revenue from health services. In our view, the drive to become more deeply involved in health is a sensible, and valuable, one.
