The CVS Prescription For Profit

The phrase "I need to drop off my prescription" is becoming increasingly common among people who are busy balancing work, family, leisure time and in many cases a new more active retirement. Although Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) may be the best at delivering a one-stop shopping experience, CVS Caremark (NYSE:CVS) has managed to remain the dominant force in filling drug prescriptions. Investors interested in the battle for drug pharmacy superiority should consider the following.

First Nine Months Of 2008
CVS operates a chain of more than 6,300 retail locations and generates $85 billion in annual revenue. CVS revenue increased 16% for the first nine months of the year to $63.3 billion over the same period a year ago. The increase in revenue was attributed largely to its merger with pharmacy services provider Caremark Rx Inc last year, and it helped CVS increase operating profit 30% and contributed to a slight increase in its operating profit margin during the same time frame. The acquisition of Caremark Rx also prompted the name change from CVS to CVS Caremark.

Pharmacy Services revenue has been aided by an increase in retail network claims due to an increased enrollment in the government drug benefit program Medicare Part D. (Be sure to check out Getting Through The Medicare Part D Maze.)

Meanwhile, revenue from Retail Pharmacy has been been aided by several factors including:

• Relocating existing stores to convenient freestanding locations
• Acquisition of nearly 700 Albertson's standalone drugstores

Positive Demographic Trends
The aging American population that uses medications as a first line of defense against disease and pain should help CVS grow its revenue. CVS has also implemented innovative ideas like health screenings offered at its 541 MinuteClinics in 27 states and the introduction of a new healthcare saving program targeted at helping the uninsured access generic drugs.

A Note of Caution
The rising cost of medicine is a hot topic. Investors should note that revenue growth for CVS could shrink if managed care organizations and government bodies are able to lower the cost of prescription drugs. In addition, customers already headed to Target or Wal-Mart for other shopping may drive right by their local CVS in favor of the big box retailers.

Location May Be The Key
Convenience is a premium commodity few pass up. CVS has managed to grow through acquisitions, new government sponsored programs and the repositioning of standalone store locations cutting the distance between their services and customers. Threats of lower prescription drugs costs and the draw of all-in-one retailers are present, but CVS's focus on new ideas and convenience may be enough to keep them in the game.

For related reading, check out Analyzing Retail Stocks.