CVS Earnings Review: Integration Costs Take Toll On Margins

by Trefis Team
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CVS (NYSE:CVS) announced its Q2 earnings on Tuesday, August 2nd. In the quarter ended June 30th, the company’s revenue grew by 17.6% year-on-year (y-o-y) to $43.7 billion for the quarter. Despite the growth, the revenue figures actually missed market expectations by $550 million. The increase in revenues was driven by the strong performance of the Pharmacy Services Segment, which recorded an increase of 20.7% in revenues over the prior year quarter to $29.5 billion. The Retail/LTC segment’s revenues increased 16% on a y-o-y basis to $19.9 billion. This was driven by the acquisitions of Omnicare and Target’s pharmacies during the last year. Operating income increased 3.9% on a y-o-y basis to $2.3 billion. The integration costs related to the acquisitions inflated the company’s operating expenses by over $100 million. Excluding the acquisition and integration expenses, the company’s operating profit increased 6.5% over the prior year quarter, while earnings decreased 27.4% on a y-o-y basis to $0.86 per share. The decline in net income was primarily due to an increase in interest expense, acquisition costs and early extinguishing of debt of $542 million.

Income

Non GAAP

Segment Performance

PSS

The Pharmacy Services Segment, the largest contributor to the company’s revenue, witnessed growth of 20.7% on a y-o-y basis and reported revenues of $29.5 billion for the quarter. The growth in revenue was fueled by a 23% increase in the revenue of the Pharmacy Segment, primarily due to growth in net new business. The division’s operating income also increased 10.4% on a y-o-y basis to $1.04 billion for the quarter, due to the acquisition of Omnicare and increased generic drug sales.

Retail

The Retail/LTC segment also performed well in the quarter, with revenues increasing 16% over the prior year quarter to $19.9 billion. This was primarily due to an increase in same store sales and the Omnicare and Target acquisitions. On a y-o-y basis, same store sales increased 2.1%. The division’s operating income increased marginally to $1.7 billion. This negatively affected the segment’s operating margin, which decreased 1.2 percentage points over the prior year quarter to 8.5%.

Free Cash Flow

The company reported a significant increase of 33% in its Net Cash from Operating Activities, which resulted in the company’s free cash increasing 38.2% on a y-o-y basis to $2.9 billion year-to-date.

Cash Flow

Outlook of the Year

After the results in the first two quarters, the company has reiterated its earnings per share guidance of $1.38 to $1.41 for the next quarter. For the full year, the company revised its full year earnings guidance to $4.92 to $5.00 from $5.24 to $5.39 per share. The change in the guidance is primarily driven by the aforementioned integration costs and the impact of losses due to early extinguishment of debt. The company also expects to generate $6.3 billion to $6.6 billion in free cash in this fiscal year.


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