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How CVS is Shoring Up Its National Retail Footprint

Phalguni Soni

Earnings Preview: Key Performance Drivers for CVS Health in 2Q15

(Continued from Prior Part)

Store count increases

CVS Health (CVS) is planning to increase its net retail store count by ~150 in 2015. The net retail square footage is expected to increase by ~2% in 2015. In 1Q15, CVS added 28 net new stores.

Strategic benefits of the Target pharmacies acquisition

If the pharmacy deal with Target (TGT) closes as expected by the end of 2015, about ~1,660 Target locations would be added to CVS’s store count. According to Dave Denton, CVS Health’s CFO (chief financial officer), the $1.9 billion purchase price for Target’s pharmacies business enables CVS to expand its store footprint at about a fifth of the capital cost.

Small format stores

The Target transaction will also give CVS a foothold in Western US markets like Seattle and Denver,  where it doesn’t yet have a presence. CVS and Target (TGT) also have co-development agreements. Both companies are looking to open five to ten small-format Target stores in the next two years in urban areas, making use of CVS’s real estate pipeline. Each of these stores would have a CVS pharmacy located in the store. This will help in higher urban penetration.

Peer group reset strategy

Walgreens Boots Alliance (WBA) had ~8,240 retail drugstores in the United States as of May 2015. Including international operations, WBA had more than 12,000 locations. WBA plans to close 200 locations in the United States as part of a restructuring plan.

Rite Aid (RAD) also has been closing down some of its stores as it resets its strategy. RAD has been shoring up its presence in health and wellness and revamping stores to its new wellness format. It has revamped 1,636 stores to the new format since fiscal 2012, or ~36% of its retail stores.

CVS and Walgreens Boots Alliance together constitute 11.7% of the portfolio holdings of the Consumer Staples Select Sector SPDR ETF (XLP).

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