Post-acquisition, Eckerd transformation shapes up

Drug Store News,  Oct 10, 2005  

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With more than a year under its belt since CVS officially took ownership of Eckerd's Southern stores, the company has begun to release early results of the turnaround that is just beginning to take shape in the former Eckerd stores.

With the re-grand opening celebrations now completed in its Florida and Texas markets, it appears that all of CVS' hard work on the Eckerd integration has started to take shape. The company's August same-store sales provided the first real look into CVS' progress thus far. So far, the early results have been most positive. Overall the lift in the Eckerd stores contributed 64 basis points to CVS' total same-store sales; core CVS stores were up 5.5 percent versus 9.8 percent in the Eckerd stores. So far the improvement is coming mostly from the front-end of the store. Comp sales in the front-end of the Eckerd stores grew 23.1 percent in August versus 4.2 percent in core CVS. On the other hand, while the Eckerd pharmacy comps are positive at 4.7 percent, pharmacy same-store sales in pre-existing CVS stores grew 6.1 percent.

And like an iceberg, that's just the part of the turnaround visible so far--there is a lot more upside here once you get beneath the surface. "We expect Eckerd to benefit our total comps by about 100 basis points in the fourth quarter," CVS chairman, president and chief executive officer Tom Ryan said last month at a Goldman Sachs investors conference.

In addition, the chain also expects to reap synergy savings in excess of the $100 million target it provided analysts when it announced the deal. CVS also has made significant headway bringing the shrink situation in the Eckerd stores under control. Shrink in the Eckerd stores was more than two times the industry average of 2.5 percent prior to the acquisition. Today that number has been reduced to less than 4 percent--still about 200 basis points higher than core CVS stores.

"There is no structural reason why these stores should have any higher shrink rate than [core] CVS stores," Ryan said.

To address the situation, CVS added its VIPER system, which helps identify theft issues occurring within the operation, as well as a hiring mechanism that has been in place at CVS for many years, that uses a red-yellow-green system for identifying people that were unsuitable to be hired. "I can assure you that Eckerd managers were hiring people that we would have called 'in the red' [at CVS]," Ryan explained. "People you don't want to hire."

But the real win is in completing the sales turnaround in the Eckerd stores. We see a big $300 spread in sales per square foot, and we are just starting to turn that around," Ryan said. CVS' sales per square foot is tracking at $834 versus $499 in the Eckerd stores. "Most of the time when we are remodeling these stores the first year it s kind of disruptive in the stores [as we remodel the stores].

Then there is the margin opportunity that still exists that has CVS executives and Wall Street analysts licking their chops. According to Ryan, a 450 basis point spread is separating EBITDA margins in the Eckerd and core CVS stores.

CVS seems to have momentum on its side--not to mention a jacked-up team of associates in the former Eckerd markets.

"I just came back from our manager/pharmacist meeting in Orlando, [Fla.]," Ryan noted. "We had 3,000 of our people there, and they are pretty fired up. They are beginning to see what is happening in the marketplace. They're seeing new customers coming into the stores every day, who are saying, 'I didn't know you were open 24 hours.'

"It's going to take a long push, but its going to be successful going forward," Ryan summarized. "Again, there is no structural reason [the Eckerd stores] should perform any differently than core CVS."

Eckerd-to-CVS report card

* Performance in the former Eckerd stores added 64 basis points to CVS' total same-store sales.

* It has reduced shrink by more than a full percentage point in the Eckerd stores, which had tracked at roughly two times the industry average.

* Sales in the Florida stores--where CVS has higher brand recognition than in Texas--are up 10 to 20 percent over pre-acquisition levels.

* In-stock levels in the former Eckerd stores reached more than 97 percent by June.

* Wait times at the pharmacy counter are down significantly, with more than 90 percent of prescriptions filled in 15 minutes or less in the Eckerd stores.

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