Clear Road Ahead for CVS
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
CVS (NYSE: CVS) competes with many other smaller pharmacies for patients, as well as supermarkets and big boxes that have set up their own in-store pharmacies. Because of the large number of companies in this sector, it can be difficult for one retailer to gain a lasting advantage over its rivals. But CVS is now in an ideal situation because three of its main competitors have experienced difficulties that could set them back for some time, giving CVS a great opportunity to carry out its own expansion plans such as the roll-out of quick health service clinics in its pharmacies.
The Walgreen's (NYSE: WAG) contract with Express Scripts (NASDAQ: ESRX) ended in January, and the companies still have not reached a new agreement. Although Walgreen has other pharmacy benefit management partners, such as OptumRx, this dispute has already weakened Walgreen and made CVS' competitive position stronger. A Reuters article reported that Walgreen's same store sales fell by 5.8 percent in May, while CVS increased its earnings guidance because it had attracted some Walgreen customers.
Rite Aid (NYSE: RAD), another major drug store chain, has also been attracting more customers in recent months. Alaric Dearment at Drug Store News wrote that Rite Aid reported 1.1 percent higher same store sales in May. Some analysts expected Rite Aid to gain bigger benefits from the problems at Walgreen, although this news could still encourage Rite Aid investors who remain hopeful about a turnaround. The weaker than expected sales growth for Rite Aid could mean that CVS attracted some of the pharmacy patients the analysts thought Rite Aid would attract. Rite Aid currently has $6.35 billion in debt, $162 million in cash, and a 1 percent operating margin, so it needs a lot more good luck to recover from its own problems. If Rite Aid keeps reporting losses, banks might decide to stop offering Rite Aid more loans.
Another strong CVS competitor has built pharmacies in its stores, but shoppers know Wal-Mart (NYSE: WMT) best as a general discount retailer. Walmart is much larger than the pharmacies it competes with, and it has set up stores in many nations throughout the world. Wal-Mart's foreign operations have caused trouble for the company recently, as the Mexican branch of Wal-Mart has been accused of bribing Mexican officials. Anne D' Innocenzio, at the Associated Press, reported that several New York City pension funds filed a lawsuit against Wal-Mart in June over the alleged bribery scandal. CVS has stores throughout the United States, and its investors expect the pharmacy to keep growing. Foreign expansion offers a potential way for CVS to grow further, although this strategy carries risks of its own, as Rite Aid's problems arguably started with an acquisition in Canada.
CVS already faces competition in the quick service clinic business, as Walgreen and Wal-Mart have set up some of their own clinics already. CVS' Minute Clinics offer some basic health services, such as flu shots, to pharmacy visitors. Wendy Rigby, at Kens5 San Antonio, reports that quick service clinics where technicians offer basic health services are becoming more popular because fewer physicians are available to treat patients at hospitals. CVS has already set up 600 of these clinics and plans to add 100 Minute Clinics per year for the next few years. A May 2012 Las Vegas Review-Journal article reported that CVS had set up more quick service clinics than Walgreen and Wal-Mart, who has 350 and 40 clinics respectively.
All three of CVS' competitors seem like they need more time to fix their problems. Jon Kamp, for Dow Jones Newswires, reported that Express Scripts canceled its lawsuit against Walgreen, although Walgreen also noted that the companies were no closer to reaching a new contract. Rite Aid still has a negative profit margin, even if its sales have improved a bit, and its high debt load limits its future options. The New York pension funds filed a suit against Wal-Mart very recently, and the AP article mentioned more than 12 suits against Wal-Mart. CVS seems like it's in a good position to gain some ground on its competitors.
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