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CVS Caremark 1Q Profit Rises 8.8%; Raises Fiscal Year View

05/02/2012 | 11:48am US/Eastern
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--An extra day for leap year and the early onset of the allergy season helped lift retail sales

--Valentine's Day season sales jumped 9%, a positive shift after a weaker-than-expected holiday hurt the fourth quarter

--CVS has picked up business driven away from Walgreen after it left the Express Scripts network at the beginning of 2012

(Updates with details from the CVS conference call and the latest stock quote.)

 
   By John Kell 
   Of  
 

CVS Caremark Corp.'s (>> CVS Caremark Corporation) first-quarter profit rose 8.8% as its pharmacy-benefits-management business again performed well and an extra day for leap year and the early onset of the allergy season helped lift front-end sales.

The drugstore-chain raised its full-year adjusted-earnings guidance for the second time this year on a greater-than-expected benefit from business being driven away from rival Walgreen Co. (WAG), which left pharmacy-benefits manager Express Scripts Holding Co.'s (ESRX) network at the beginning of the year due to a contract rate dispute.

Better-than-expected first-quarter results also factored into the higher target, with CVS now seeing earnings between $3.23 to $3.33 a share, up from the $3.18 to $3.28 a share previously expected. The company's second-quarter profit outlook also topped Wall Street's expectations.

Shares were up 2% at $45.62 in recent trading, while Walgreen declined 1.2% to $34.31.

CVS has picked up business driven away from Walgreen as the dispute with Express Scripts forced some customers to transfer their prescriptions. CVS has launched marketing and in-store investments to court influx customers and is hopeful it can retain the new business even if Walgreen were to secure a new contract with Express Scripts.

In an interview with Dow Jones Newswires, CVS Chief Executive Larry Merlo said the company has seen an influx of customers and his team has done a good job of introducing the firm's brands to new clients. He said the response has been "very favorable." CVS on Wednesday said the full-year guidance reflects the potential estimated benefit if the stalemate continues only through the end of the second quarter.

In the latest quarter, the company said revenue in its pharmacy-services business surged 32% to $18.3 billion, again boosted by its acquisition of a Medicare prescription drug business. Merlo told analysts the unit benefited from new payers including the California Public Employees' Retirement System and International Business Machines Corp. (>> International Business Machines Corp.), as well as product launches.

On the retail side of the pharmacy business, revenue rose 9.9% to $16 billion. Same-store sales increased 8.4% over the prior-year period, with pharmacy same-store sales rising 9.8% as CVS outperformed all main competitors even more so than in prior quarters, according to Merlo. The overall 8.4% jump was the largest increase CVS has reported since late 2006, before it acquired Caremark.

The increase contrasts with Walgreen, which has reported slumping same-store sales since the beginning of the year. April data from Walgreen and smaller peer Rite Aid Corp. (>> Rite Aid Corporation) are due Thursday.

CVS said an extra day for leap year and an additional week day due to a calendar shift bolstered the retail business. Prescription volumes were higher, though CVS said pharmacy same-store sales were hurt by recent generic drug introductions, a trend that hurts that metric as they carry lower prices than branded products.

A weak flu season hurt the pharmacy business, though it was partially offset by the early onset of the allergy season. Merlo said those trends were reversed a year ago, when the U.S. had a severe winter and strong flu season but a late allergy season.

Merlo told Dow Jones front-end sales were also bolstered by a 9% jump during the Valentine's Day season, a positive shift after weaker-than-expected holiday revenue hurt fourth-quarter results. He added MinuteClinic retail health-care centers notched 22% top-line growth, a performance Merlo said continues to validate that business.

During the CVS conference call, Merlo said front-end sales also benefited from new Express Scripts customers, though the gain wasn't material in the first quarter.

"As we said previously, initial focus was on making the prescription transfer process as seamless as possible," said Merlo. "We began to shift gears during the quarter to focus on converting these new customers to front store customers."

For the first quarter, the company posted a profit of $776 million, or 59 cents a share, compared with a year-earlier profit of $713 million, or 52 cents a share.

Earnings from continuing operations, which excludes acquisition-related items, rose to 65 cents a share from 57 cents a year ago. CVS had predicted 61 cents to 63 cents a share.

Revenue jumped 20% to $30.8 billion, a record sum according to the company. Analysts expected $30.31 billion in revenue.

Gross margin slid to 16.6% from 18.5%, in part hurt by increased expenses associated with new PBM clients and the expansion of the Medicare Part D operation.

-By John Kell, Dow Jones Newswires; 212-416-2480; john.kell@dowjones.com

--Mia Lamar contributed to this article

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