UPDATE: CVS Caremark 4Q Net Up 17% As Revenue, Margins Rise

CVS Caremark Corp. (CVS) posted a 17% increase in fourth-quarter net income as sales and margins for the nation's largest drug-store chain rose, aided by strength in its retail operation while its pharmacy benefits management program was disappointing.

CVS also said its chief financial officer for nearly a decade will retire at the end of 2010.

"I feel comfortable with my decision, because the company is in a very strong financial position and is well positioned for long-term growth," CFO David Rickard said during a conference call Thursday as CVS discussed its fourth-quarter results.

CVS plans to seek a replacement through an internal and external search. Rickard joined CVS in 1999. CVS Caremark is now the largest drug-store chain in the country with 6,900 stores.

CVS reported fourth-quarter adjusted earnings of 70 cents a share, up from 58 cents a share a year ago, and a penny ahead of the consensus estimate.

Revenue rose 10% to $24.14 billion, ahead of analysts' expectations of $23.29 billion.

The retail side of the business showed continued strength in the fourth quarter, with revenue of $13.8 billion, a 19% year-over-year increase. Operating margin was 7.02%, up 83 basis points from last year.

Total same-store-sales rose 3.6%, with pharmacy sales up 4.5% and retail sales ahead 1.8%.

Gross margin climbed to 21.6% from 20.3%.

Sanford C. Bernstein & Co. estimated that 7% of the revenue growth stemmed from the Longs Drug Store acquisition in October, another 4% to 5% from calendar shifts, and the balance from new store expansion.

Pharmacy benefit management results were on the weak end, with total revenue at $11.8 billion, a 1.5% year-over-year increase; operating margin dropped 5 basis points to 6.45%.

"We expect 2009 operating results for CVS to be relatively consistent with 2008, with a strong retail performance and a relatively weak pharmacy benefit management performance," Sanford C. Bernstein analyst Helene Wolk said.

Pharmacy operators have been cutting costs, including trimming their work forces, as the weak economy has led consumers to fill fewer prescriptions. CVS, which last month said the trend would continue for most of the year, has been aggressively promoting discount drug programs, as have several other drug chains. This can increase sales among the uninsured but could also threaten margins.

CVS last month warned investors that 2009 margins in the CaremarkRX pharmacy benefits business, acquired for $27 billion in 2007, would be tight after it lowered prices to keep clients.

The company has emerged as one of the largest survivors of a bruising, multiyear consolidation of the U.S. pharmacy business. The Longs takeover expanded CVS's footprint into Western markets where it has been weak.

CVS Caremark last month boosted its quarterly dividend 11%, citing its continued strong financial performance and significant cash generation, marking the sixth consecutive year of increases.

Shares of CVS were trading recently at $28.86, up $1.87, or 7%93.

-By Karen Talley, Dow Jones Newswires; 201-938-5106; [e-mail]

(Shirleen Dorman contributed to this report.)