CVS Caremark Corp. reported weaker-than-expected first quarter earnings, with sales hurt by harsh winter weather, intense competition and a mild flu season.

CVS Caremark Corp., CVS/pharmacy, Larry Merlo,

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CVS' first quarter earnings rise, but miss forecasts

May 2nd, 2014

WOONSOCKET, R.I. – CVS Caremark Corp. reported weaker-than-expected first quarter earnings, with sales hurt by harsh winter weather, intense competition and a mild flu season.

CVS said Friday that overall revenue for the three months ended March 31 rose 6.3% to $32.7 billion from $30.8 billion a year earlier. But adjusted earnings per share (EPS) for the first quarter fell just short of Wall Street analysts' forecast and the company's guidance.

Sales in the CVS/pharmacy drug store segment edged up 2.7% to $16.5 billion from about $16 billion a year ago. Same-store sales were up 1.4%, reflecting a gain of 3.8% in the pharmacy and a decrease of 3.8% in the front end. Comparable-pharmacy prescription count rose 2.1% on a 30-day equivalent basis.

The shift of Easter to April 20 this year from March 31 in 2013, along with softer customer traffic, reduced front-end sales in the first quarter by about 80 basis points, CVS reported, and the extreme weather in the quarter and the comparison against last year's strong flu season led to a negative impact of 140 to 160 basis points on front-end same-store sales.

On the plus side, CVS reported modest improvements in basket size — and more significant improvements in margins — in the front end. The gain in total same-store sales stemmed mainly from the increase in prescriptions filled and cost inflation of brand name drugs, the company said, adding that comparable-pharmacy sales reflect a negative impact of about 120 basis points from introductions of new generic drugs, which carry lower selling prices but higher profit margins.

CVS said net income in the retail pharmacy and pharmacy benefits management businesses in the first quarter benefited from the impact of increased generic drugs dispensed and slower growth in expenses. Net earnings got a lift from rebate improvement in the pharmacy services segment and increased front-end gross margins at CVS/pharmacy. Operating profit rose 19.5% to about $2 billion in the quarter, and the company generated free cash flow of $1.8 billion, with cash flow from operations of $2.2 billion.

"We once again posted a very strong quarter, with solid results across the enterprise," CVS Caremark president and chief executive officer Larry Merlo said in a statement. "Adjusted EPS increased 22.5%, to $1.02, which was a penny below our expectations primarily due to the significant amount of unforeseen weather-related issues we experienced throughout the quarter. I'm particularly pleased with the exceptional growth in the PBM, especially the growth of the specialty pharmacy business. Additionally, with the substantial amount of free cash we generated during the quarter, we remain confident in our ability to achieve our 2014 goals."

CVS said it opened 22 new retail drug stores, relocated nine drug stores and closed seven retail drug stores, one specialty retail pharmacy and one infusion branch during the first quarter. As of March 31, the company operated a total of 7,675 retail drug stores, as well as 17 on-site pharmacies, 24 retail specialty pharmacy stores, 11 specialty mail-order pharmacies, four mail-service dispensing pharmacies, and 84 branches and six centers of excellence for infusion and enteral services.