FINANCE

CVS profit nearly doubles on tax cut; to hike wages and benefits

BY Marianne Wilson

CVS Health Corp. will increase employee wages and expand benefits, including introducing paid parental leave, amid a huge jump in its fourth quarter profit as a result of a windfall from the new tax law.

CVS’ net income jumped 92.6% to $3.29 billion, or $3.22 per share, in the quarter ended Dec. 31, from $1.7 billion, or $1.59 per share, a year earlier, helped by a tax benefit of $1.5 billion. Excluding tax savings and a $56 million charge related to the proposed acquisition of Aetna, the company earned $1.92 per share, better than analysts’ average estimate of $1.89.

Net revenue grew 5.3% to $48.4 billion, fueled largely by 9.3% growth in its pharmacy services segment. Pharmacy services revenue hit $34.2 billion, which the company said was the result of brand inflation and an 8.2% increase in pharmacy network claims and mail choice claims.

Front-store same-store sales dropped 0.7% for the quarter, which the company said was the result of softer foot traffic and efforts to rationalize promotion strategies.

CVS’ front-end sales reflect one of its underlying weaknesses, according to Neil Saunders, managing director of GlobalData Retail.

“As much as CVS is forward thinking and innovative in health, it is an extraordinarily unimaginative and backward-looking retailer,” he said. “This is one of the reasons why front of store sales are still in negative territory despite very weak prior year comparatives and a boost to sales from remedies for a particularly nasty flu and cold season.”

Saunders said that relatively few retail shoppers see CVS as a destination in its own right, even for categories like beauty, which are naturally allied to its proposition. The reason for this relative lack of interest is the weak retail proposition, according to Saunders.

“Our consumer research shows that CVS ranks well below its peers on attributes like store design, product displays, retail customer service, ease of shop, inspiration, and brand selection,” he said. (Click here for more.)

CVS said it will use a portion of its tax savings to invest in its employees, spending $425 million annually to improve employee wages and benefits, including a plan to subsidize employee healthcare costs. The company also expects to spend at least $275 million of the tax windfall on investments in the business, including data analytics, care management solutions and pilot programs.

Effective in April, the starting wage for an hourly CVS employee will be $11 an hour, and the company said it will be adjusting pay ranges and rates for retail pharmacy technicians, front-store associates and other hourly retail workers later this year.

In addition, CVS said it would absorb the 5% year-over-year increase in medical and prescription costs, making it so that its employees’ premiums won’t increase for the 2018-19 health plan year. The company also said it will create a paid parental leave program, making it so that full-time employees with a new child can take as much as four week’s paid leave, effective April 1.

“As part of our ongoing commitment to the patients, customers and communities we serve, we said that we would invest our tax savings back into our business, and that’s exactly what we’re doing,” said Larry Merlo, CVS Health president and CEO. “Today, we’re building on the investments we’ve been making in our employees, in their wages, benefits and career development.”

CVS adjusted its 2018 guidance to include the impact of the recent tax changes, which it expects will add $1.2 billion to its cash flow.

“With $1.2 billion in cash benefits from the Tax Cuts and Jobs Act, we will be able to make strategic investments in our business in 2018 to stimulate greater growth over the longer term, and our updated guidance reflects this,” CVS Health executive VP and CFO David Denton said. “These investments will accelerate our ability to continue to improve health outcomes and lower costs for patients. Additionally, we will spend at least half of the benefits on debt reduction as we look to lower our leverage ratio.”

As a result of its investments, CVS expects operating profit for the year to be in the range of down 1.5% to up 1.5%. Previously, it expected growth between 1% and 4%.

For the first quarter, CVS now anticipates operating profit growth between 0.5% and 4.5%.

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