CVS Posts Historic Loss in the Face of Stringent Competition

Feb 06, 2002

Number-two U.S. drugstore chain CVS Corp. based in Woonsocket, Rhode Island, reports
a quarterly net loss of $133.8 million, compared with year-earlier net income
of $206.2 million. The fourth-quarter loss was the first for the company since
it went public in 1996, according to a CVS spokesman. The drugstore chain took
a hefty charge to shut 229 unprofitable stores of its more than 4,100 outlets
after a shortage of pharmacists and poor service at some of its stores crippled
sales growth. This amid its struggle to fight competition from rivals like industry
leader Walgreen Co., which plans to increase its buy of weekly advertising circulars,
in part to support its rapid growth. Although results for the quarter ending December
29 were in line with forecasts and previous company statements, analysts say they
failed to provide a clear view about how soon CVS may turn the corner.

The drugstore chain, which also cites a continued problem of store theft or
shrinkage in the latest results, say quarterly sales nonetheless rose 8.4 percent
to $6 billion from a year-ago ($5.5 billion). Sales at stores open at least a
year rose 7.5 percent, while front-end, or general merchandise, same-store sales
rose 3.1 percent. Front-end section sales, including snacks, soda, cosmetics
and photo-finishing services, generate higher margins than the pharmacy segment.
However, they make up the same merchandise that discounters like Wal-Mart Stores
Inc. and other drugstores such as Rite Aid Corp. and J.C. Penney Co. Inc.’s
Eckerd are also promoting to U.S. consumers that are seeking value in a recessionary

Moderator Comment: What is ailing CVS?

Last June in a conference call, CVS chairman, CEO and
president, Thomas Ryan, said the primary challenge faced by CVS was having enough
pharmacists on staff to handle the volume of script orders placed with it on
a daily basis.

At the time, CVS difficulties were said to be the result
of pharmacist shortages that had caused stores to cut back their hours of operation
in a number of markets. Reduced hours, out-of-stocks and a perceived lack of
service resulted from this situation. As you would expect and as the latest
news indicates, consumers have taken their prescription and front-end business
elsewhere. (To hear a replay of the CVS conference calls and to get investor
relations information go to

The lack of pharmacists is not the only problem that
CVS has to face, however. Recent shifts at the executive level suggest that
the chain is looking to regain its business-building focus.

Last month the chain announced that Larry Zigerelli,
executive vice president – marketing, was leaving the company to evaluate other
options. Chris Bodine is now the executive vice president – merchandising and
marketing. Mr. Bodine was previously the senior vice president – merchandising.

Deborah Ellinger joined CVS last October as the chain’s
executive vice president of strategic planning and business development. Ms.
Ellinger brought an impressive resume with her to CVS. She came to CVS from
Staples where she was the senior vice president of strategic planning and business
development. [George
Anderson – Moderator

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