CVS' Eckerd integration, 4Q sales prove a seamless transition

Drug Store News,  Feb 14, 2005  by Antoinette Alexander

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WOONSOCKET, R.I. -- Amid the posting of double-digit sales and earnings growth for the fourth quarter, CVS stated that it has made "considerable progress" on the Eckerd integration and confirmed that it remains on track to complete all Eckerd store remodels by July.

Since completing its acquisition of 1,268 Eckerd stores--of which about 160 have been closed--on July 31, CVS executives have shifted into overdrive to transform the ailing Eckerd locations into smooth-running CVS machines, and the results are starting to show.

"[Last year] was an excellent year for CVS and one that will probably be remembered as a pivotal year for our long-term success," Tom Ryan, CVS chairman, president and chief executive officer, told analysts during a Feb. 2 conference call.

To date, CVS has remodeled 325 former Eckerd stores and is ramping up at 40 units per week. By the end of November, CVS had completed all store and financial system conversions, remerchandised former Eckerd units with CVS product and planograms and lowered everyday prices on more than 5,000 items.

Expanding store hours at the former Eckerd stores to bolster sales also has been a key priority for CVS. In the fourth quarter, CVS converted 143 former Eckerd units to 24-hour locations and another 800 stores to extended-hour stores, noted Ryan.

On Jan. 9, CVS launched its ExtraCare loyalty card program at the former Eckerd locations. Already as much as 40 percent of sales in those stores offering the card program are being generated through ExtraCare. In CVS' core business, card usage continues to grow, with about 60 percent of sales tracking through the card.

Despite being faced with the costs of the Eckerd integration, such as expanding store labor hours and remodeling former Eckerd units, gross margins increased 10 basis points in the quarter to 26.5 percent and increased 44 basis points for the full year to 26.3 percent. CVS did benefit from an increase in the amount of generic drugs dispensed and further shrink improvement.

The dilution from Eckerd given upfront integration costs appears to be limited to [selling, general and administrative expenses] and not gross margin," stated Merrill Lynch analyst Monica Aggarwal in a research note. "In fact, we believe that gross margins from Eckerd could improve even in the near term as CVS discontinues aggressive price promotions at Eckerd divisions and puts in its own loyalty card program."

Eager to see consumer response to the changes, CVS held promotions at the remodeled stores during the weeks of Dec. 5 and 12 even though, at that time, only a few hundred stores were completely remodeled. "We experienced strong double-digit customer count increases in both weeks, and sales were up from the prior year, even with lower prices," said Ryan. "As expected, the remodeled stores are having a huge and, I believe, lasting impact on sales." Ryan noted that as CVS completes the store-remodeling project, it will hold special events to reintroduce stores to customers.

The impact of the Eckerd deal was evident in the fourth quarter as net sales rose 19.7 percent to $8.92 billion and earnings rose 12.2 percent to $295.6 million, or 70 cents per share. Last year's fourth quarter included an extra week of sales that totaled $531 million and benefited from a strong flu season.

Same-store sales, which do not include the Eckerd stores--and will not until August, at which time CVS will have owned the stores for a full year--rose 4.4 percent, while pharmacy same-store sales increased 5.9 percent. Front-end comparable-store sales rose 1.3 percent.

Looking to 2005, CVS executives said total sales are expected to increase 18 percent to 22 percent, with comparable-store sales expected to increase 5 percent to 7 percent, benefiting in the later half of the year from the acquired Eckerd stores. Earnings per share are expected to be between $2.62 and $2.68, which includes the estimated 15 cents to 20 cents per share accretion from Eckerd.

"Overall, the Eckerd integration is going extremely well, and we are encouraged by the progress, and we know we are on the right track," said Ryan. This is no longer a voyage of discovery; it is just running the CVS model and growing business every day in every store."

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