CVS Pays Price for Dodging Discounting Frenzy - 2nd Update

By Paul Ziobro and Ben Fox Rubin 

CVS Caremark Corp. paid a price for not joining in the discounting frenzy favored by some rivals, reporting lower sales of generic drugs, personal-care items and grocery products at the front area of its stores.

CVS has deliberately avoided the aggressive discounting some retailers are using to boost revenue. "Quite frankly, we think there are elements of the current promotional marketplace that are not sustainable," CVS Chief Executive Larry Merlo said.

Retailers of all stripes have been relying on discounts to lure bargain-conscious shoppers into stores amid lackluster overall sales. Over a third of packaged food and household products are now sold with discounts, as retailers and manufacturers struggle to get people to open their wallets.

Instead, CVS said it is offering more personalized deals to customers using data mined from its loyalty program. Such offers, Mr. Merlo said, leave a softer blow to CVS's bottom line.

Overall, though, the company reported rising revenue and earnings, boosted by gains in its specialty pharmacy business, drug cost inflation, and new clients and products. In addition, CVS in January completed its purchase of Coram, a provider of infusion therapies, for $2.1 billion, which helped sales.

Profit rose 19% to $1.13 billion for the quarter.

Revenue grew 6.3% to $32.69 billion. Revenue increased in both its pharmacy services business, up 10% to $20.2 billion, and its retail pharmacy business, 2.7% higher to $16.5 billion. Certain transactions are counted in the revenue of both segments, which is why their sum appears higher than the total revenue.

On its retail side, sales in front of the pharmacy counter were down 2.4% for the quarter, while sales rose 5.1% in the pharmacy.

The results come as CVS remains the lone major pharmacy chain to swear off cigarettes and tobacco products, saying they have no place in a drugstore company that is trying to become more of a health-care provider. The step reflects a big push by retail pharmacies away from simply dispensing drugs toward a broader role of providing basic health services to Americans, including millions of newly insured, amid an expected shortage of primary care doctors.

CVS, whose stores will be tobacco-free in October, is counting on the move to help its image as a provider of basic health services, especially as millions of Americans sign up for health insurance programs.

Company executives on Friday described the decision as being a draw for some customers and business it is going after. "It's just another intangible that as they're making decisions around which provider they want to go with, they feel really good about a company that's made a move like that," said Jon Roberts, president of CVS's pharmacy benefits management business.

The drugstore-operator and pharmacy-benefits manager in December said it was forming a joint venture with Cardinal Health Inc. to source generic drugs, a key issue for the industry as consumers increasingly are using the less-expensive medicines.

Write to Paul Ziobro at [e-mail] and Ben Fox Rubin at [e-mail]

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