CEO Larry Merlo points to 'strong results across the enterprise'

WOONSOCKET, R.I. — CVS Health topped Wall Street’s earnings-per-share forecast and, driven largely by its PBM unit, saw double-digit sales gains for the 2016 fourth quarter and full year.

CVS said Thursday that for the fourth quarter ended Dec. 31, revenue totaled $45.97 billion, up 11.7% from $41.15 billion a year earlier. For the 2016 fiscal year, sales climbed 15.8% to $177.53 billion from $153.29 billion in 2015.

Sales in CVS’ retail/long-term care segment, which includes CVS/pharmacy and Omnicare, rose 4.7% to $20.85 billion in the fourth quarter from $19.9 billion a year ago. CVS said the gain was fueled mainly by its acquisition of the Target Corp. pharmacy business in December 2015.

Fourth-quarter same-store sales dipped 0.7% year over year, reflecting a 2.9% decrease in the front end and a 0.2% gain in the pharmacy. CVS said front-end comparable-store sales were negatively impacted by soft customer traffic and initiatives to rationalize promotional strategies, partially offset by growth in basket size. Introductions of new generic drugs negative impacted comparable pharmacy sales by 380 basis points. Comparable pharmacy prescription count increased 2% on a 30-day equivalent basis.

For full year, revenue in the retail/LTC segment surged 12.6% to $81.1 billion from $72.0 billion a year earlier. Same-store sales were up 1.9%, including a 1.5% decline in the front end and a 3.2% increase in the pharmacy. Same-store prescription volume rose 3.6% on a 30-day equivalent basis.

Revenue in the pharmacy services segment, which includes the CVS Caremark pharmacy benefit management business, jumped 17.9% to $31.26 billion in the fourth quarter from $26.51 billion in the prior-year period. CVS attributed the gain mainly to 23.9% growth in pharmacy network and specialty pharmacy claims, fueled primarily by an increase in net new business. Mail choice claims processed in the quarter rose 4.7%. For fiscal 2016, pharmacy services revenue grew 19.5% to $119.96 billion from $100.36 billion in the previous year.

Larry Merlo

The generic dispensing rate rose about 120 basis points to 85.2% in the retail/LTC segment and 170 basis points to 85.4% in the pharmacy services segment in the fourth quarter.

Consolidated operating profit increased $266 million to nearly $3 billion for the fourth quarter and $884 million to $10.34 billion for the full year.

“In 2016, we delivered strong results across the enterprise, with revenues up nearly 16% and adjusted EPS up more than 13%. Adjusted EPS in the fourth quarter came in just above the high end of our guidance, as the retail/LTC segment delivered results in line with our expectations while the PBM exceeded expectations,” president and chief executive officer Larry Merlo said in a statement.

“We also generated more than $8 billion in free cash for the full year, exceeding our expectation, and we returned more than $6 billion to shareholders through dividends and share repurchases,” Merlo added. “Our substantial cash-generation capabilities provide opportunities to bolster our growth, and we will continue to be thoughtful and disciplined with respect to using our free cash to return value to shareholders.”

On the earnings side, fourth-quarter net income came in at $1.7 billion, or $1.59 per diluted share, compared with $1.5 billion, or $1.34 per diluted share, in the year-ago period. CVS said the gain reflects increased operating profit and a lower effective income tax rate, partially offset by a loss on early debt retirement and increased interest expense.

Adjusted EPS for the 2016 quarter was $1.71, compared with $1.53 a year ago. Analysts, on average, had projected adjusted EPS of $1.67, with estimates ranging from a low of $1.64 to a high of $1.68, according to Thomson Reuters.

For the 2016 fiscal year, net earnings totaled $5.32 billion, or $4.91 per diluted share, up from $5.24 billion, or $4.62 per diluted share, a year earlier. Adjusted EPS was $5.84 for 2016, compared with $5.16 in the previous year. Analysts’ consensus estimate was for adjusted EPS of $5.81, with projections running from a low of $5.78 to a high of $5.82, according to Thomson Reuters.

Confirming earlier guidance, CVS forecasts GAAP diluted EPS of $5.02 to $5.18 and adjusted EPS of $5.77 to $5.93 for fiscal 2017. For the 2017 first quarter, the company expects GAAP diluted EPS of $0.82 to $0.88 and djusted EPS of $1.07 to $1.13.

“As we outlined late last year, we have a four-point plan in place to return to more robust levels of growth in the years ahead,” Merlo stated. “We remain confident in our model and our position in the evolving health care landscape. We can bring value to all health care stakeholders, helping them achieve their goals of making care more affordable, accessible and effective.”

On average, analysts surveyed by Thomson Reuters project CVS’ adjusted EPS at $5.86 for fiscal 2017, with estimates ranging from a low of $5.80 to a high of $5.95.

CVS opened 40 new retail drug stores, relocated 16 stores and closed 25 retail stores in the 2016 fourth quarter. As of Dec. 31, it operated 9,709 retail stores, including pharmacies in Target stores, in 49 states, the District of Columbia, Puerto Rico and Brazil.

CVS added that, as previously reported, it plans to close about 70 retail stores in fiscal 2017 and expects to take a charge of about $225 million from the stores’ remaining lease obligations of such stores. Most of the store closures are slated to occur in the first quarter. In connection with the closings, the company posted a $34 million asset impairment charge in the 2016 fourth quarter.