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CVS’ Tweaking of Its Stores Is Good for CVS Stock

Will Ashworth

CVS Health (NYSE:CVS) announced strong first-quarter results  on May 1, causing CVS stock to gain 6%.

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However, the financial results were not the most interesting part of CVS’ report.  Instead, what caught my eye was the $135 million store rationalization charge the company took in Q1 to cover the cost of closing 46 underperforming stores in 14 different states.

CVS is closing less than 1% of its retail stores, and the company is continuing to tweak its retail stores to deliver the maximum value for its customers and the owners of CVS stock.

When it comes to CVS and CVS stock, this change is GOOD.

If a store’s not pulling its weight, get rid of it. If a product’s not drawing in the customers, get rid of it. CVS’ management is doing what’s necessary to keep its store network extremely profitable. For the owners of CVS stock, that’s an excellent thing. Here’s why.

It Can Always Be Better

A quick look at CVS’ first-quarter results suggests it’s still very profitable, as its adjusted operating income jumped 56.8% versus the same period a year ago. On the top line, sales increased by 34.8% to $61.6 billion, although a significant portion of that gain was due to CVS’ acquisition of Aetna. Excluding  Aetna, the increase in the company’s Q1 revenue wasn’t nearly as robust.

While CVS didn’t disclose  the revenue that  Aetna generated last quarter, I estimate, using a “back of the napkin” calculation,  that  the company’s revenue growth excluding the deal was roughly flat.

But in an effort to drive future revenue and profit, CVS is remaking its retail pharmacy business in order to integrate it more effectively with health insurers . Additionally, as InvestorPlace writer Dana Blankenhorn recently pointed out, CVS is taking various steps to enable consumers to reduce their healthcare spending. 

A Changing Retail Footprint

The company is transforming the square footage of each of its 9,600 locations to reflect a business that’s more about healthcare services and less about “front of the store” candy bar sales.

Don’t get me wrong; the products it sells in the front of its stores help pay the bills to keep the lights on, while healthcare services will be what rewards the owners of CVS stock.  

In November, CVS CEO Larry Merlo made it clear that the company’s stores were being dramatically redesigned to accommodate this change in business strategy.

“I don’t see the size of the store changing from what you would know it to be today, but I do see some space being repurposed,” Merlo said. “[CVS will] partner broadly with others in the community around elements that indirectly impact health care.”

One of those changes is adding SmileShops to the back of dozens of its stores. In those stores,  SmileDirectClub will provide teeth-straightening services. CVS carried out a 13-store pilot of the initiative; it found that the stores brought in new customers who otherwise would never have shopped at CVS.

Initially, it plans to add SmileShops to 100 locations. Eventually, SmileShops could be added to as many as 250 stores if the initiative continues to raise stores’ traffic.

Teeth-straightening certainly falls under the category of healthcare. There are only so many places where consumers can get this service. By comparison, how many places can they go to buy shampoo?

Square footage maximization is the game. And CVS is playing it to the max, benefiting the owners of CVS stock in the process.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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