Loucks Associates News

A Bright Spot

by Eric Beazley, Civil Engineer

CVS Caremark (CVS) entered the Minneapolis/St. Paul market in 2003, and has been gaining market share and brand recognition ever since. A look at CVS’s business model and related growth strategies would be a provocative case study and may teach us how to turn lemons into lemonade, as, even during the current economic downturn, CVS has managed to grow (in terms of number of stores, services and balance sheet.) To that end, the following provides a broad brush overview of this company’s past, present and anticipated future successes.

CVS was founded on May 8, 1963, is publically traded under the symbol CVS and is headquartered in Woonsocket, Rhode Island (1). Currently, CVS Caremark operates mail-order pharmacies, retail pharmacies, specialty pharmacies and retail clinics. It operates in 44 states and employs approximately 215,000 people. At the end of 2008, the company operated 6,923 drugstores, 560 MinuteClinic locations (a Minneapolis-based company), 58 retail specialty pharmacy stores, 19 specialty mail-order pharmacies, six mail-service pharmacies, CVS.com and Caremark.com websites. CVS opened a total of 317 new or relocated stores in 2008, which increased their retail square footage by 3.6% (2). In the Twin Cities CVS currently operates 35 stores with four more stores soon to open in Minneapolis, Little Canada and Brooklyn Park.

So, why and how is CVS Caremark continuing to flourish during this economic downturn? A thorough analysis of their annual reports over the last few years may lead to some answers. According to CVS’s 2008 annual report (2) a number of factors spurred their growth including, but not limited to, acquisitions and growth in generic drugs. CVS also showed strong cash flow, which buffered it from liquidity issues. Its net revenues increased from $76.3 billion in 2007 to $87.5 billion in 2008, or by 14.6%.(2) Gross profit as a percent of net revenues was 30.1% in 2008 as compared to 29.1% in 2007 and 28% in 2006. Note that gross profit includes net revenues less the cost of merchandise sold. Finally, operating profit as a percent of net revenues was 7.1% in 2008 as compared to 6.0% in 2007 and 5.3% in 2006(2).

On a less positive note CVS stock fell 27.7% in 2008. However, they performed better than the S&P 500 index, which fell 38.5% and the Dow Jones Industrial Average (DJIA), which fell 33.8% in the same period. Further, CVS Caremark shares returned an average of 10.4% annually over the past five years while the S&P and DJIA showed negative returns of 2.2% and 1%, respectively.(2)

These numbers begin to tell the story of CVS’s success, but surely there is much more to learn. The bottom line is it is very refreshing to see a bright spot in the gloom surrounding our economy today.

(1) http://en/wikipedia.org/wiki/CVS/Pharmacy

(2) CVS Caremark Corporation 2008 Annual Report, Healthy Outcomes AR 08