Commentary: CVS needs to do better at retailing
As good as CVS’s [second quarter] overall numbers are, the headline from a retail perspective is the 1% decline in front-of-store comparable sales. This reverses last quarter’s uplift which was aided by a shift in the timing of Easter and a particularly bad cold and flu season. In essence, it underlines the point we made last period — namely that when it comes to retail, CVS is a long way from maximizing its potential.
It is particularly notable that many of the categories CVS sells as part of its retail offer saw strong positive growth during the period. Across the U.S., beauty sales were boosted by consumers with more money to spend; snacks and food treats saw good uplifts. And things like greetings cards and stationery witnessed some growth. That CVS did not capitalize on these opportunities says a lot about the state of its retail offer.
Our consumer data show a number of reasons for this and, in our view, the figures are worrying for CVS.
Firstly, CVS is increasingly used out of necessity rather than out of desire, with people coming into the store to buy things that they need to top-up on or have run out of. While there is nothing wrong with trading on convenience, not drawing in customers who want to shop for different reasons means that CVS is missing out on a large slice of trade. Such a position also means CVS Is vulnerable to rivals—both physical stores that open in close proximity and the rise of certain categories online.
Secondly, those shoppers who do visit a CVS store are becoming less likely to browse and shop categories outside of those they came in to buy. This deterioration in cross-shopping is another lost opportunity for CVS and makes it difficult for the company to boost sales of impulse-driven segments like beauty. In our view, it also signals an increasing challenge in getting pharmacy customers to make retail purchases while in store.
Thirdly, the proportion of customers who use CVS for special purchases like small gifts or greetings cards and gift wrap continues to decline. Given that many of the products in this category are high margin and boost basket sizes, this is a worrying trend that has the potential to erode the bottom as well as the top line of the retail operation.
Finally, there are some categories, such as laundry detergent for example, where a shift to online shopping and automatic ordering is starting to impact the number of customers to come in to top-up shop. Relative to other dynamics, this trend is relatively minor, but we still see it as having the potential to erode revenue over the medium to longer term.
If all or any of these things were the result of deep-seated and complex challenges, we would have some sympathy. However, the root cause of most of the trends is because CVS is poor at retailing. Store environments are dingy, inspiration is lacking, merchandising and shop-keeping standards are generally sloppy, and the offer is bitty and fragmented. With a little care and attention, CVS could turn these things around, but the company never seems to bother.
As much as the healthcare and pharmacy side of the business will allow CVS to succeed, we lament the fact it is missing out on a lucrative slice of retail growth.
CVS Health in Q2 loss but still beats Street
CVS Health’s second-quarter revenue and earnings topped the Street amid growth in prescription volume and its pharmacy benefit management business.
The company swung to a net loss of $2.56 billion, or $2.52 a share in the period ended June 30, from a profit of $1.10 billion, or $1.07 a share, in the year-ago period. Excluding non-recurring items, such as a $3.9 billion goodwill impairment charge related to its long-term care business, adjusted earnings per share were $1.69, above analysts’ estimates of $1.61.
Total revenue grew 2.2% to $46.71 billion, above estimates of $46.32 billion. Same-store sales increased 5.9%.
Revenues in the pharmacy services segment increased 2.8% to approximately $33.2 billion. Revenue from CVS’ retail pharmacy segment rose 5.7% to $20.7 billion, with an 8.3% increase in pharmacy revenue amid increased prescription volume. Front-end sales inched up 0.2%. Same-store prescription volume increased 9.5%. Front-store same-store sales fell 1%, which the chain attributed to softer customer traffic and the shift of the Easter holiday to the first quarter as opposed to the second quarter last year.
“Our solid performance both in the quarter and year-to-date demonstrates our ability to drive value. It also builds upon a strong foundation for a seamless integration of CVS and Aetna with one goal: to transform the consumer health care experience and, by doing so, deliver long-term profitable growth for shareholders,” said CVS Health president and CEO Larry Merlo.
CVS expects its roughly $69 billion acquisition of health insurer giant Aetna to close in the late third quarter or early part of the fourth quarter.
“The genuine enthusiasm and the depth of talent throughout the CVS and Aetna organizations will be key assets as we focus on realizing the potential of our combination,” Merlo said.
Analyst Neil Saunders, managing director of GlobalData Retail, commented that while the healthcare and pharmacy side of the CVS business will allow it to succeed, the company is nowhere near maximizing its potential when it comes to retail.
“Store environments are dingy, inspiration is lacking, merchandising and shop-keeping standards are generally sloppy, and the offer is bitty and fragmented,” Saunders said. “With a little care and attention, CVS could turn these things around, but the company never seems to bother.” For more of his comments, click here.
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Jewelry chain files Chapter 11—again
A Texas-based jewelry retailer has filed for bankruptcy protection amid a legal probe of its Indian-based parent company.
Samuels Jewelers said that its approximately 122 stores and its e-commerce site will remain open for business as the company seeks to restructure its finances while continuing normal business operations. The retailer, which listed liabilities between $100 million and $500 in its Chapter 11 filing, said it expects the restructuring process will enable it to significantly reduce its outstanding debt.
“We are confident that we are taking the right steps for Samuels Jewelers,” said Farhad Wadia, CEO, Samuels Jewelers, which operates stores under the Samuels Diamonds, Samuels Jewelers, Schubach Jewelers, Rogers Jewelers, and Andrews Jewelers banners.
“Our customers around the U.S. can continue to count on an outstanding shopping experience and excellent service whenever, wherever and however they choose to shop with us. As we prepare for another holiday season, our national team members are ready to serve the families who will be shopping with us.”
Samuel Jewelers is owned by India’s Gitanjali Gems Ltd., whose chairman Mehul Chinubhai and his nephew, jewelry designer Nirav Modi, are wanted by the Indian authorities in connection with an alleged $2 billion bank fraud against the country’s Punjab National Bank. They fled India before the charges against them were filed, according to Reuters. A special Indian court issued warrants against the pair—both of whom have denied the allegations—last month.
Samuel’s first filed for Chapter 11 in 1992, when it was owned by Barry’s Jewelers, and did so again in 1997. In 1998, the company changed its name to Samuels Jewelers, and sold a majority stake to DDJ Capital Management. It filed again in 2003. In 2006, it was acquired by its present owner.
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