Shares of CVS Health dropped more than 11 percent in premarket trading, on Tuesday, after the drugstore retailer revealed it missed revenue projections. Citing slowing prescription growth and a loss of contracts to industry rivals, analysts have lowered its guidance for the whole of the fiscal year.
“We are currently experiencing slowing prescription growth in the overall market as well as a soft seasonal business,” explains CVS chief executive Larry Merlo. “These factors combined are leading us to reduce the mid-point of our guidance for this year by five cents per share. The network changes have more significant implications for our 2017 outlook. While we expect a healthy increase in [pharmacy benefit management] operating profit growth in 2017, we expect a decrease in retail operating profit growth.”
Still, retail analyst—and CEO of Conlumino—Neil Saunders, insists that CVS “remains a robust and impressive firm,” noting that its third-quarter performance was, at the very least, “admirable,” though the company will probably continue to have trouble with its competition, mainly Walgreens.
In a note, Saunders notes, that the retail side of CVS’ business is “stuck in a rut.” He goes on to say, “While the comparable sales lift of 2.3% for retail pharmacy as a whole is not too bad, all of this comes from pharmacy-related sales. Front of store revenues declined by 1% on a comparable basis, a better position than last quarter’s 2.5% decline but far from a good result considering they come off the back of a 5.8% drop in the prior year.”
The Affordable Care Act has, in fact, expanded some of the ways that drugstore retailers can offer medical services. It has also lowered some health care costs, and that could ultimately affect retail sales. But CVS has also left a lot of money on the table, so to speak, when it chose to stop selling tobacco products nary two years ago. Sure, this move legitimized the company’s place as a healthcare provider but tobacco sales have long been a major components of drug store profit.
But CVS also needs to pay more attention to the customer experience. Saunders continues, “Our own customer data shows a continued dropping off of satisfaction with the CVS in-store experience, something that could ultimately have a knock-on effect to pharmacy sales and to the success of other parts of the business. It also does not bode well for the upcoming holiday season where beauty is, once again, set to be a key gifting category.”