Prescriptions For Profit

By Eugene Bukoveczky | February 10, 2010 AAA

For the last couple of months, retail drug store shares have sold off heavily, as investors responded negatively to the steady stream of data coming from the group, showing a universally-weak sales trend.

In these tough times, consumers have not only cut their purchases of such small luxuries as cosmetics and confections, but also necessities like prescriptions. But there are now signs that the sales and profit picture for the group could be on the mend.

IN PICTURES: 10 Insurance Tips For Homeowners

CVS Reports Surprise Sales Jump
Recently, industry leader CVS Caremark (NYSE:CVS) saw its shares jump by more than 5%, following the release of quarterly results that showed a decent uptick in same-store-sales. While earnings per share for the quarter of 79 cents roughly matched expectations, same-store-sales, a key measure of retail health, rose a healthy 4.9%. (learn more about how to analyze retail stocks, see Analyzing Retail Stocks.)

Also boosting investor confidence was evidence that problems with the company's prescription drug benefits administration business may have been resolved. The unit earlier lost two major clients, accounting for about $4.8 billion in sales, but new client adds appeared to have offset much of these losses.

Negative Sales Trend Industry Wide
CVS's improvement in same-store sales stands in stark contrast to the disappointing sales trend recently reported by rival Walgreens (NYSE:WAG), which reported a 1.1% drop in the same metric against analyst's expectations of a 2.2% gain. It was second straight month that Walgreens' same-store sales have been in the negative column. Smaller pharmacy chain Rite Aid (NYSE:RAD) also hasn't been immune to the negative sales trend, recently reporting its seventh consecutive negative sales month in December.

Pharmacies Now Adopting Low Cost Prescription Plans
In both these cases, prescription sales were down, in addition to general merchandise. And that's a big problem in the pharmacy business, since many shoppers in to fill a prescription tend to buy other items before they leave the store.

But CVS seems to have found the solution to turning this trend around. The company saw its prescription sales jump after it adopted a 90-day prescription sales plan. Such bulk buying schemes are a lower cost option for many consumers and covers many generic drugs. It's a strategy that Wal-Mart (NYSE:WMT) has had in place since 2008, and one that the pharmacies have recently picked-up on. Walgreens launched its own scheme last year.

Generic Drug Windfall Ahead
Any loss in profitability resulting from this shift in prescription marketing strategy will likely be more than made up for by pending developments with generic drugs. Large numbers of branded drugs are now poised to be replaced by generics, offering pharmacies dramatically higher margins. While competition will ultimately determine how high these margins can go, most analysts covering the sector see a huge profit windfall ahead.

The Bottom Line
Matching Wal-Mart's low-cost prescription sales strategy appears to paid off for CVS and will probably stem the negative sales tide for the rest of the players in the retail drug sector. That should be enough to swing market sentiment back into the bullish camp for this group.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus
Related Analysis
  1. The ADX Shows Strong Uptrends In These 4 Stocks
    Chart Advisor

    The ADX Shows Strong Uptrends In These 4 Stocks

  2. 5 Stocks To Watch Ahead Of Halloween
    Stock Analysis

    5 Stocks To Watch Ahead Of Halloween

  3. Downward Trend Channels for the Market Correction
    Chart Advisor

    Downward Trend Channels for the Market Correction

  4. Oil, Oil Stocks: What The Charts Are Saying
    Chart Advisor

    Oil, Oil Stocks: What The Charts Are Saying

  5. Stocks Breaking Below Head and Shoulders Patterns
    Chart Advisor

    Stocks Breaking Below Head and Shoulders Patterns

Trading Center