(Operator Instructions) I would like to welcome everyone to the CVS Caremark Corporation Third Quarter Earnings Conference Call. I will now turn the call over to Ms. Nancy Christal, Senior Vice President of Investor Relations for CVS Caremark Corporation.
Thanks for joining us today for our third quarter earnings call. I’m here with Tom Ryan, Chairman, President and CEO of CVS Caremark and Dave Rickard, Executive Vice President and CFO. Today’s call will be a little different from our past calls. Given the extreme volatility and undue pressure on our share price we want to take the opportunity this public forum presents to answer the key questions on the minds of investors.
Following some opening remarks Tom will answer the top questions we’ve been hearing head on. Then Dave will address a question most companies have been getting lately, what our credit and liquidity position. Dave will also provide a financial review of the third quarter and guidance for the year, and then we’ll take some questions. We ask, as always, that you limit yourself to one to two questions including follow up so we can get to as many analysts and investors as possible.
For your information, we expect to file our 10-Q for this quarter by the end of the day tomorrow and it will be available through our website at investor.cvs.com. Given that we complete our annual budget late in the year our practice is to provide guidance for the next year on our fourth quarter call. Our fourth quarter call will be held on February 19th. The timing of this year’s fourth quarter call will be a little later than usual due to the reporting calendar change that we told you about on our first quarter 2007 call, following the completion of the CVS Caremark merger.
As a reminder CVS historically has been reported its financial results on 4-4-5 retail calendar a leftover from the days when CVS was part of Melville. Year to date we’ve reported the overall company on that basis. Other retailers and healthcare providers, including our primary peers report on a calendar year basis as did Caremark prior to the merger. As we told you last year our plan is to report the combined company on a calendar year basis beginning in the fourth quarter of this year.
This morning, we’ll discuss some non-GAAP financial measures in talking about our company’s performance, namely free cash flow, EBITDA, and adjusted EPS. In accordance with SEC regulations you can find the definitions of the non-GAAP items I mentioned as well as the reconciliations to comparable GAAP measures on the investor relations portion of our website at investor.CVS.com.
As always, today’s call is being simulcast on our IR website. It will also be archived there for a one month period following the call to make it easy for all investors to access the call.
Before we continue our attorneys have asked me to read the Safe Harbor Statement. During this presentation we will make certain forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. Accordingly, for these forward looking statements we claim the protection of the Safe Harbor for forward looking statements contained in the Private Securities Litigation Reform Act of 1995.
We strongly recommend that you become familiar with the specific risks and uncertainties that are described in the Risk Factors section of our most recently filed Annual Report on Form 10-K and that you review the section entitled Cautionary Statements Concerning Forward Looking Statements in our most recently filed quarterly report on Form 10-Q.
Now I will turn this over to our CEO, Tom Ryan.
I’m happy to report that despite the difficult macro economic environment we posted solid third quarter results right in line with our plan. In the third quarter we achieved record sales, record operating profit, record earnings per share and record cash flow. Even in these difficult and uncertain times we continue to gain share in our retail business, our PBM continues to retain existing clients and attract new ones.
We successfully completed the tender for Longs and we’ll close the acquisition actually today. We will improve the profitability of Longs and this acquisition will be a medium and long term contributor to our retail and our PBM businesses.
We ended the quarter with over 540 Minute Clinics more than any other competitor and we have plans in place that we expect will continue to improve Clinic returns.
Lastly, our strong balance sheet and cash flows will continue to provide us with ample liquidity which is especially important during these turbulent times. Basically we’re in pretty good fighting shape. Never the less with all the turmoil in the markets some challenging questions are being asked about our business that deserve to be answered. Let me address the top 10 questions directly.
Why is script volume growing slowly and slowing down industry wide and what are the long term implications?
While we do question some of the completeness of the IMS data there is no question RX growth trends have slowed over the last two years. There are several reasons for the slowdown. One, prescription antihistamines that switched to over the counter status notably Zyrtec in January ’08 are having a notable impact on our comps. In fact it’s about 80 basis points year to date. We will cycle this in February ’09. Two, box warnings and general safety concerns, drugs like Vioxx, Celebrex, etc. and more recently some of the anti-depressants have had a negative impact on comps.
Three, a weak brand pipeline, the slow FDA approval process and the pull back of big pharmas marketing efforts are also factors. Four, consumers are being asked to bear more costs then they have in the past. The average co-pay today for prescription is $25 versus $15 in 2000. That also affects utilization. Then you have some seniors who enter the donut hold in Med B may begin to stretch their Meds out.
Lastly, while its difficult to measure the impact recent stats show that the weak economy has led to fewer doctor visits and more self medication which obviously results in fewer prescriptions being written. It may perhaps explain the growth of our over the counter health category and the fact that cough and cold business is up almost 10% year to date. Despite these headwinds we continue to grow and gain pharmacy share. The proof is in the numbers.
Pharmacy comps in the third quarter were 3.8% outpacing our competition. In fact, we led the way in pharmacy comps in the first quarter, the second quarter and the third quarter of this year. I expect our pharmacy comps to accelerate in the fourth quarter versus the third quarter due to easier comparisons and continuing share gains for our company.
While pharmacy growth trends have definitely slowed some of it is due to cyclical one time events. I can’t predict the future but I’m pretty sure Americans will continue to get sick, continue to grow old and use prescription medications. Payers and patients understand the appropriate use of prescriptions is critical to reducing overall healthcare costs.
We will continue to gain share because we have convenient locations and store hours. We have the best in store execution. We have excellent service. We have a successful customer loyalty program. We have upside from previous acquisitions and future file buys and we will benefit from our unique PBM relationship with payers and patients.
How is the slowing economy and financial crisis affecting your front store sales?
Obviously it’s no secret that consumer sentiment is at an all time low. It does affect front store sales a bit as people trade down in sizes and actually purchase less discretionary items. You need to remember that true discretionary sales make up only about 15% of our front store sales or less than 3% of our total company revenues.
Despite the economy our third quarter front store comps were very strong at 3.3%. Our performance has led the industry as we continue to gain share versus food, drug and mass competition in categories that make up 85% of our front store volume. I expect front store comps in the fourth quarter to be better than the third quarter once again due to relatively easy comparisons and continued share growth from new programs and new categories and new programs such as the four million Extra Care cards we have in the marketplace.
Let me make a few observations about our front end business. First we have not increased our overall level of promotion from our original plan. In fact, front store margins continue to be very solid helped by private label, shrink control and our Extra Care card. Our private label sales continue to grow that’s driven by execution as well as the fact that consumers are more willing to try private label in this economy.
Private label reached 15.5% of our front store sales up 111 basis points versus last year and we have grown sequentially as a percent of our front store sales throughout the year. Remember like pharmacy generics growth in private label negatively impacts comps but it helps our front store margins.
On the flip side our front store comps are benefiting from front end inflation which we think added about a 1 to 1.5 percentage points to our front store comps. This will wane as commodity prices decrease going forward. I think we’re doing pretty well given the cautious consumer, given all of the above I expect total comps in the fourth quarter to be in the 3.5% to 5% range. That translates in the comps for the year of 3% to 5% slightly lower than we thought due to higher than expected private label sales as well as the consumers trading down in this economy.
Why is the performance of our PBM trailing our peers this year?
We have a few unique comparisons this year versus our independent PBM competitors. First, the loss of a $2.5 billion FEP mail specialty contract. Second, the outsize price compression from a $4 billion FEP retail contract going from its third year to its first year in economics. Third, our Med D PDP business is significantly larger than our stand alone PBM peers. It will impact us more both and up and down.
As you know, we experienced higher than expected utilization and some adverse selection this year which impacted Med D margins. I will say if you look at the managed care competitors in the PBM space our margins and trends are much better. It is clear that our PBM EBITDA growth on a comparable basis has been pretty flat this year but if you adjust for the loss of FEP and specialty we’ve had solid revenue and EBITDA growth.
The Med D business has caused you to reduce PBM’s gross margins expectations for this year. How is it doing and how will it look next year?
The Med D business is complex and it’s relatively new and it seems to cause a lot of confusion. I want to try to explain our business maybe better than we have in the past. In our Med D business we operate a PDP called SilverScript which is a wholly owned subsidiary. We also have a 50/50 joint venture with Universal American in a PDP called Prescription Pathway and thirdly, we provide PBM services to both SilverScript and Prescription Pathway. Together this forms what we call our Med D business which generates about $2 billion in revenue.
In total our Med D business has about 1.1 million lives this year. It’s comprised of 550,000 lives in SilverScript and 530,000 lives in Prescription Pathway for which we get half the economics. As we previously announced the joint venture with Universal American will be splitting up at year end. We will consolidate our portion of the lives into SilverScript. The joint venture will be divided such that we maintain roughly a 50/50 split of the economics.
As you know open enrollment for the non-duals beings November 15th. We anticipate that we’ll have over 850,000 lives in our SilverScript PDP in ’09 and approximately 500,000 lives from the Longs RX America PBM and we should have well over 1.3 million members in ’09. Our Med D business will be profitable for the full year. In fact, our Med D business was profitable for the first half of the year. What was not profitable in the first half of the year was our PDP, the insurance piece of the Med D business.
However, our PDP will be profitable in the second half. That really reflects the seasonality of the business. Let me explain, in the first half of the year a PDP typically pays out more in RX claims than it gets in premiums. In the second half of the year as more people enter the donut hole we pay less in RX claims while we receive the same amount of premiums hence the seasonality.
The accounting rules don’t allow us to smooth that out so we recognize losses and gains as they occur in each quarter. This should follow a similar pattern every year. When we bid for 2009 we in fact raised our insurance premiums and changed some plan designs. An example would be we had a zero deductible plan that we moved to a $50 deductible. We did this in light of the utilization we saw this year. We expect less adverse selection in ’09 we also expect to pick up some dual eligible. As a result our Med D business as I just defined it is expected to be slightly more profitable next year.
Another question we get related to our PBM is, are the new proactive pharmacy care offerings gaining traction with clients?
The short answer is a resounding yes. I’ll touch on maintenance choice first since this gets most of the air time. To date 137 clients have signed up for maintenance choice for a January ’09 start representing about two million lives. That’s a pretty significant uptake for a brand new healthcare offering. We have many other clients who are actively interested that may go live in the second half of ’09.
Maintenance choice offers the economics of mail with the convenience of retail. It’s call maintenance choice because members are free to choose how they receive their 90 day maintenance medication, at the CVS Pharmacy or through Caremark mail. It wouldn’t surprise me given this economy if more companies don’t opt for mandatory mail programs especially with maintenance choice as a big selling point.
Next is our Extra Care health care which provides a significant discount on CVS private label FSA eligible OTC products to Caremark members who elect to participate. As I said earlier we have four million cards out this year and we expect to add another six million next year. The offering is attractive to clients as a way to provide savings to members while really providing a unique platform to personalize messaging for at risk populations such as diabetics, people who are hypertensive as well as targeting members for wellness and prevention programs. While it’s early we are beginning to see share gains both in front store and pharmacy from customers who have the Extra Care health card.
The other example I’ll give you is proactive medication engagement programs which are delivering incremental scripts as we look to improve adherence rates to appropriate drug regiments. This will keep people healthier and lower overall healthcare costs. We view this as a big opportunity because there are significant gaps in pharmacy care in this country. You may have heard these stats but 30% of the people never fill their first prescription. Of those who do 30% drop off after the first refill and an amazing 50% drop off after the first year.
These gaps lead to significant increases in healthcare costs for employers and government. These payers often bear the cost of illness and disease attributable to member non-compliance. Our local CVS pharmacist can intervene with customers face to face and when that’s not possible they can reach out via the phone. These interactions have led to significantly better outcomes then outbound phone calls from a call center.
We are leveraging our broad and unique touch points with patients and our single view of the patient to grow our business and to lower healthcare costs for our clients.
What are the results of the 2009 PBM selling season?
We’ve completed about 90% of the contracts that were up for renewal this year. On the last call we told you that we had won contracts with first 12 month revenues of about $4.3 billion. We’ve made continued progress since then and I can report that we’ve won contracts with first 12 month revenues of $5.2 billion now. We’ve added $900 million since our last call.
We’ve had a very successful selling season on the employer side with over 98% retention and significant new wins that you’ve heard about. In total we won close to 90 new clients this year so I’d say our model is working. Unfortunately we also saw some significant losses including the $2.5 billion Coventry Med D business that was discussed on the last call. We also had a couple of large accounts that were lost due to acquisitions by managed care companies, obviously the Well Point and Humana acquisitions. We lost some other small health plans and Med D accounts where the pricing didn’t make sense to us.
Normally by the end of the third quarter the selling season is basically complete. This is certainly the case for our renewals and new customers starting in January 1. The mid year pipeline is actually a little stronger this year. Our net new business for the ’09 selling season could actually improve and we’ll keep you posted on that.
Let me summarize where we are at this point in time. The $5.2 billion in the first 12 months revenue will have an impact on 2009 revenues of about $4.5 billion. The $4.5 billion in ’09 incremental revenues is nearly offset by the known terminations. For 2009 revenue impact perspective the wins and losses are in fair balance. If nothing else changes from where we are now we expect PBM revenues to be up some next year due to utilization and inflation.
Given the turmoil in the financial markets and the economy why are you buying Longs now and in fact why are you buying Longs at all?
First, this was an opportunity to acquire hundreds of quality locations in real estate markets that are difficult to penetrate. It would have taken us at least 10 years to replicate this in these markets. We saw the opportunity and we took advantage of it. The acquisition makes us number one retail drug store chain in California and Hawaii and it strengthens our position in Arizona and Nevada. Longs distribution centers in California and Hawaii will also be valuable additions to our distribution network.
Second, we expect to improve the profitability of Longs stores, just as we have with Eckerd and Save-On. Obviously this is not a great time given the macro economic conditions especially in California but the economy will come back and when it does the new CVS Pharmacies will be ready. Third, Longs operates a successful PBM RX America. We will integrate RX America’s PBM and PDP business into our own over time. We expect this business to be a nice compliment to our PBM.
Also, by accelerating growth in these key geographies we help our PBM clients and facilitate the roll out of our new proactive pharmacy care offerings. We still expect the Longs transaction to be $0.01 to $0.02 dilutive to adjusted EPS in ’08. In light of the weak California economy we will conservatively increase our ’09 dilution estimate by $0.01 to $0.06 to $0.07. I remain confident that the deal will be $0.04 to $0.05 accretive to adjusted EPS in 2010 and accretive to adjusted EPS in the low double digits in 2011.
As for our integration plans we will not disrupt the stores during the holiday season for obvious reasons. The integration will really start in the first quarter of ’09. Here’s a timetable for some of the key events. Store system conversion will start March 1st and be completed probably by the end of May. Corporate office will close by the end of the summer, I would say about 80% of it should be shut down by June. Resets and remodels will start mid-March and be completed by mid-October. The name change event should be completed by the end of the third quarter. Longs will be fully integrated by the fourth quarter of ’09.
What progress have you made with Minute Clinic and when will that business be profitable?
Since its inception Minute Clinic has handled over 2.4 million patient visits. We’ve treated 280,000 patients in the third quarter of this year alone. More than 20% of those patients have never been into a CVS Pharmacy. With high customer approval ratings we remain convinced that we’re filling a need for a convenient, high quality, low cost healthcare alternative. At the end of the quarter we had 541 clinics in 27 states. We’re on track to have about 560 clinics by year end.
We entered three new markets this quarter. We also opened up two clinics on a corporate campus and expect to open up three more corporate clinics in the fourth quarter. As we said before the utilization of the clinic especially in newer markets has been a little slower than we planned. Our focus has shifted from just growing the clinics to increasing utilization and growing revenues.
First, while we have more clinics then anybody in the US consumer awareness of the clinics is still relatively low. We will begin to leverage our retail advertising spend to drive clinic awareness. Second, we will expand our offerings. We’ve added wellness and prevention services such as healthcare screenings, smoking cessation and camp physicals just to name a few. We also currently have a pilot underway where we are leveraging our Minute Clinic operations to provide training for our specialty customers on certain injectable medications with a possible roll out in the second half of ’09.
Third, we’re focused on contracting with more payers. We’ve added 39 million available lives to our network in the third quarter. Approximately 70% of Minute Clinic visits were third party paid in the quarter. Payer support for retail clinics continue to grow. In fact, there was a recent Blues plan that eliminated co-pay for members that use the clinics. Their data shows that members and employees saved up to $1.2 million in healthcare costs in ’07 just by using the clinics.
As we’ve said before Minute Clinic is an investment mode. While we expected to invest $0.03 to $0.04 per share in ’08 the investment this year is closer to $0.05. I expect to invest about $0.05 again next year and to break even in 2010.
It seems like every drugstore, supermarket and mass player offers some kind of low cost generic program. Do you plan to respond?
The answer is yes. On November 9th we will launch a new RX Health Savings Pass which will allow customers to purchase 90 day supplies of over 400 generics for $9.99. How does health savings pass differ from other programs? First, our focus is on 90 day supplies of maintenance generics only. Second, our enrollment fee of $10 and the $9.99 price for 90 day supply is a terrific value and one of the best in the marketplace. Third, our Health Savings Pass will include a 10% discount at Minute Clinic. Fourth, our customers can earn CVS extra bucks with their health savings pass.
Let me be clear, I told you that we haven’t seen a material share loss due to our competitor’s $4 generic program and that’s still the case today. The obvious question is why now? We’re in the middle of an understated difficult economic crisis to say the least. People are struggling with healthcare costs more than ever before especially the under and un-insured. We felt it was the right time to offer a differentiated affordable option.
Given the enrollment fee and the fact that we expect some share gain and increased foot traffic we think the RX Health Savings Pass shouldn’t cost us more than $0.01 or so per share on an annual basis.
Can you tell me about your liquidity and access to credit in these markets?
I’m going to let Dave address that before his financial review and then we’ll be back for some closing remarks and some Q&A.
I’m happy to address the question of our liquidity and access to the credit markets in view of the difficulties being reported by some companies in these turbulent times. The news is good for CVS Caremark. The company is on solid footing and we’ll be able to meet all obligations both current and perspective. We have well laddered public debt and a successful $4 billion Commercial Paper program fully backstopped by committed bank credit facilities.
These facilities are syndicated to a wide array of many of the best finance banking institutions in the country. The obligations of these banks are contractual and those contracts were recently reviewed by outside council to assure us that their tight agreements with no unusual conditions giving the banks discretion not to fund if we asked them to. In its simplest form if the CP markets were to freeze for an extended period we have the ability to draw on the bank lines and be fully financed. We have Board approvals in place to enable us to be agile in dynamic market conditions. Those are the basics.
We demonstrated our access last week when we were able to fund successfully the Longs acquisition with a combination of the Bridge loan facility, cash on hand and Commercial Paper. Unlike some companies lately we did not need to draw on our back up bank facilities. We had billions available to us that we simply didn’t need. We continuously evaluate our capital structure and given the strong cash flows of the company we’re in a very good position right now. There are many companies out there that cannot say the same.
Now on to the review of the quarter, I’ll walk you through our third quarter financial results with an emphasis on the segment details afterwards I’ll provide guidance for the balance of the year. In the third quarter total revenues on a consolidated basis increased 1.8% to $20.9 billion. This number is net of inter-segment eliminations of $1.2 billion. In our retail drug store segment revenues increased 5.3% to $11.5 billion. Same store sales for the quarter were up 3.7%.
As Tom highlighted front store comps were up 3.3% while pharmacy same store sales were up 3.8%. New generic introductions reduced pharmacy comps in the third quarter by approximately 280 basis points. PBM net revenues of $10.6 billion were down 1% to 2007 third quarter revenues. Adjusting that growth for the impact of generics net revenues would have grown 6.2% for the PBM.
The impact of the change in Pharmacare’s revenue recognition method on the third quarter was the addition of $429.6 million in reported revenues before inter-company eliminations and $328.1 million after inter-company eliminations. Given the Pharmacare change commenced in September 2007 this change has now been completely cycled.
In the quarter PBM total retail network revenues were $6.8 billion rising 6.6% from 2007. The PBM’s retail generic dispensing rate increased to 66.1% compared to 61.6% in the third quarter 2007. Retail network claims grew 2.7%. As with the previous few quarters this was largely driven by new business ERS being the prime among the new clients.
We also benefited from the growth spurt in our Med Part D business and add on lives from existing clients. As expected mail claims decreased for the quarter by 20.2% as with the first two quarters of this year. The impact of new clients was more than offset by the well known terminations that commenced in January of this year. Total mail revenues declined 12.9% to $3.6 billion and within total mail revenues PBM mail was down 22.9% compared to the third quarter of 2007, while our specialty mail revenues increased 6.6%.
If you exclude the FEP business from last year’s data total mail revenues decreased by 3.7% reflecting generic conversions while specialty revenues grew 16.7% in the third quarter. The mail generic dispensing rate rose to 55.2% from 49.0% a year ago or 620 basis points. Our overall mail penetration rate decreased approximately five percentage points from 2007’s third quarter to 23.3% again this was largely as a result of the absence of the FEP mail business.
Moving on to gross profit margin for the total company, the overall business expanded by 61 basis points over the third quarter 2007 to 21.1%. Within the retail segment gross profit margins were up more than 60 basis points improving to 30.4%. Like past quarters the primary drivers of these were the following. First, the 436 basis point increase in the retail generic dispensing rate to 68% of scripts filled. Second, increased private label penetration as consumers traded down. Third, the benefits from the Extra Care program that allow us to more proactively target our best customers, finally, improved shrink.
We’ve cycled the vast majority of the purchasing synergies related to last years merger so the positive comparative impact from them this past quarter was greatly diminished. Gross profit margins in the PBM segment came in at 8.4% that’s down approximately 30 basis points versus the 2007 third quarter. Excluding the 35 basis point drag from the conversion of Pharmacare’s contracts the gross margin in the PBM would have been up approximately five basis points.
As with the retail business the PBM pharmacy margin benefited from an increase in the use of generic drugs while the incremental boost from the merger related purchasing synergies waned as they recycled.
What about expenses? Overall operating expenses as a percent of sales improved 20 basis points. In the retail segment operating expenses decreased as a percentage of sales from 24.1% to 23.4% along with disciplined expense control this was driven by the continued improved expense leverage in the Save-On and Osco stores that we are experiencing even now two years after we purchased them. Somewhat offsetting this was the large growth in generics which pressure sales dollars while improving profitability.
In the PBM segment comparable operating expenses as a percentage of revenues improved by approximately 20 basis points to 2.2%. This was largely driven by solid expense control in the core PBM operations. All things considered we saw significant expansion of our operating margins specifically in the retail segment. The operating profit margin in the retail segment grew by 139 basis points over 2007 to 7.0%. The PBM segments operating profit margin was down 15 basis points from 2007’s comparable results to 6.3%.
Caremark’s industry leading EBITDA per adjusted claim increased to $4.27 in the third quarter that’s up 1.2% over last year’s comparable $4.22 or plus 7.6% from the second quarter. However, the loss of the FEP mail service contract obviously had a major impact. Excluding FEP mail EBITDA per adjusted claim was up in the high single digits versus last year.
Moving on to the rest of the income statement we saw quarterly net interest expense on the consolidated income statement decrease to $113 million or by eight basis points as a percentage of revenues. This reflects primarily the more favorable short term rates we experienced year over year in the third quarter and the impact these had especially on the three year floating rate note we placed May 2007. Our tax rate was 39.5% in the quarter and our diluted share count was 1.47 billion shares.
As with the second quarter the shares are down considerably from last year’s third quarter due to the timing of the commencement of last year’s share buy back program which occurred during the fourth quarter 2007. During this year’s third quarter we did not repurchase shares. As we said in August when we announced the Longs tender offer we have delayed the remaining portion of our current $2 billion share buy back until the later half of 2009 in order to fund the acquisition.
Before I move on to earnings per share I want to discuss the latest development in our discontinued operations. Many of you know that as of a few weeks ago Linens ‘n Things the former subsidiary of CVS’s former parent company Melville is now in liquidation. At the time of the Melville restructuring CVS Corporation assumed a contingent liability for leases of several former Melville businesses including Linens. Due to the liquidation our real estate team has assessed the expected costs of satisfying lease guarantees for the Linens stores that are closing.
The loss from discontinued operations of $82.8 million you see on our income statement for the third quarter represents our estimate of the impact of the rest of these closings net of income tax benefits. This should be the full extent of our loss from Linens. I’ll point out again that this is simply not big enough to throw CVS Caremark off track. Yes, it’s unfortunate and yes there is some cash impact but that’s it. Keep in mind that our full year earnings guidance will exclude this impact from Linens ‘n Things.
Putting discontinued operations aside what did all this mean for EPS? Adjusted EPS from continuing operations rose 20.4% to $0.60 up from $0.50 in 2007. GAAP diluted EPS from continuing operations rose 23% to $0.56 for the quarter compared to $0.45 in the third quarter 2007.
Turning to the other financial statements we generated $386 million in free cash flow in the quarter and $892 million year to date. Net capital expenditures were $401 million in the quarter which reflected proceeds from sale lease back transactions of $127 million netted against the gross capital spend.
Let me take this opportunity to talk about our remaining plans for this years sales lease back program. Those of you who have been following the retail side of the business for a while know that we typically bundle our current crop of newly developed stores together in the fourth quarter and go out to the sale lease back market in order to monetize the stores. Given the recent choppiness in this market we’ve decided to delay our sale lease back probably to next year and most likely it will involve several transactions throughout the year rather than just one big one at some point.
I believe we can all agree that this is the prudent course of action in order to avoid locking in 20 year obligations at peak embedded interest rates. We’ll continue to assess the market conditions and the associated spreads and we’ll update you as we move forward. Of course this means that our free cash flow in both 2008 and 2009 will be affected. Accordingly we anticipate shifting approximately $650 million from 2008 into 2009.
This in no way affects our ability to fund the business or the Longs acquisition as we have ample cash flow from operations to do both. With this in mind and noting that our free cash flow in the third quarter was $386 million our current forecast for 2008 free cash flow stands at approximately $2.3 billion. Of course we get that $650 million back in 2009 free cash flow.
Where will earnings come out this year? I’m going to first give you guidance excluding Longs to be consistent with our previous statements about the business. Then I’ll review the impact of Longs and pull it together. For the full year we expect revenue growth for the total company of about 13% to 15% after inter-company eliminations of somewhat over $5 billion. For the PBM segment on a comparable basis we continue to expect full year revenue growth to be about flat to 2007 but well over 20% on a GAAP basis.
For the retail segment we expect revenue growth of between 6% and 9% for the full year. As Tom said, our comp guidance for the full year is 3% to 5%. We’ve gotten some questions on why the gap between total sales and comp sales is a little wider this year. Remember that our total sales guidance includes an extra four days of operations in the fourth quarter versus 2007. As Nancy reminded you earlier this is the quarter in which we switch from our retail calendar to a monthly calendar and as such our quarter and year ends will be December 31st rather than December 27th.
Now let’s turn to margins, for the total company gross profit margins are still expected to be down modestly due to the mix impact as we average in a full 12 months of Caremark. We continue to expect PBM gross margins to be down somewhat from last year’s rate. Gross margins for the retail segment to an increase by at least 75 to 100 basis points.
As for expenses we still expect total company operating expenses as a percentage of revenues to improve significantly. That’s largely due to mix. Total operating expenses as a percentage of sales for the PBM segment on a comparable basis is still expected to be rather flat to 2007 numbers as we continue to see good expense control. This is being directionally offset by the 2008 startup costs of some of the new business Tom highlighted.
The retail segment continues to exercise disciplined expense control so we still expect it to show moderate improvement. We expect total consolidated amortization for 2008 to be approximately $400 million and depreciation to be approximately $850 million. All of that should lead to solid improvement in operating profit margins for the total company. I continue to be optimistic about surpassing our operating margins high watermark of 6.6% that we achieved back in the year 2000.
Despite the volatility in the credit markets we still forecast net interest of about $475 to $500 million and we believe that our tax rate should approach 40%. Given the delay of our sale lease back transaction net capital expenditures are now expected to be in the range of $1.9 to $2 billion for 2008. This merely reflects the absence of the approximately $650 million of sale lease back proceeds and does not imply any changes in our capital spending program. As a result, as I mentioned before our free cash flow is expected to be roughly $2.3 billion before Longs.
How does all this roll out for 2008? For core CVS Caremark our previous guidance for adjusted EPS from continuing operations was a range of $2.44 to $2.50. Given the magnitude of financial and consumer pressures that we’re seeing in the marketplace the top end of that range no longer seems likely. I’m going to take $0.02 off the top. The new guidance range for adjusted EPS from continuing operations is therefore $2.44 to $2.48 before Longs.
As Tom reminded you earlier Longs is expected to be $0.01 to $0.02 dilutive to adjusted EPS in 2008. Adding that to the core creates a guidance range for adjusted EPS from continuing operations including Longs of $2.42 to $2.47. At this point you should adjust your models to include Longs; it’s now part of the company.
The free cash flow impact of Longs in 2008 is a use of about $150 million. That moves the free cash flow guidance to something around $2.2 billion including longs.
With that I’ll now turn it back over to Tom for some closing remarks.
Obviously it was a solid quarter across all of our businesses with a 20% plus growth in earnings in any environment that’s really good growth in this environment I think its terrific growth and it was right in line with our plan. I’m pleased with the strength of our company. That doesn’t mean we won’t have our share of challenges but we continue to make investments so we’ll be well positioned for the long term for share gains and improved shareholder returns.
The Longs integration team has hit the ground running and we look forward to working with our new colleagues and completing another successful integration in ’09 one that will provide significant upside for our retail and PBM businesses. Our new proactive pharmacy care offerings are being adopted at an accelerating pace and I think the next few years will be an exciting time for our company as we transform pharmacy healthcare.
Now I’d be happy to take your questions.
(Operator Instructions) Your first question comes from Tom Gallucci - Merrill Lynch.
Tom Gallucci - Merrill Lynch
Going back to the PBM wins and losses revenue net neutral in past I think you’ve given a little color on the mix of the business particularly the mail order mix that seemed positive in the past can you update us on that at this point.
Generally I think we’ll have a higher mix of mail order clients. The clients that we signed on especially in the employer arena are typically have higher mail penetration so that will be the case for ’09.
Tom Gallucci - Merrill Lynch
Turning to the retail business we’re pretty much through the month of October at this point any color that you can offer on the front store trends given that the credit crunch started late September just an update there.
Our October numbers are pretty good and better than the second quarter. The Halloween selling season is off to a pretty good start. Obviously most of it happens in the last few days which we’re in now but we’re pleased with actually the seasonal which is the one that you kind of worry about that’s the discretionary spend in our front end of our stores but we’re pretty pleased about it. Overall, given the consumer sentiment and where the economy is we’re pretty happy with our front end business what we did in the quarter and where it is now.
Your next question comes from Scott Mushkin – Jefferies.
Scott Mushkin - Jefferies
I was wondering poking a little bit more at that maintenance choice I know you made some comments on that. I think your beta testing it right now and I was wondering if you had any results that you wanted to share about 90 day utilization and whether you think you’re going to have enough data as we approach the new selling season in February ’09 whether you’re going to have enough data to show perspective new clients the power of the combined organization.
Yes, I think a lot of the clients had mandatory mail and it’s obviously an offering that makes it easier for their employees to use. As I said earlier I do believe that companies have a difficult time doing mandatory anything. We’re no different as our company. I think what you’ll see is companies may be more willing to move to a mandatory mail program with this offering. We do see an increase in share and we see 90 day at retail continues to increase due to this program.
Scott Mushkin - Jefferies
One thing you didn’t talk about and I keep getting questions on is the Troy, Chrysler and what kind of impact that could have on your numbers as we move forward?
As you know we have the Chrysler employees and the competitor has Ford and GM. There’s a lot of moving parts, a lot could happen when this comes out if in fact it does happen. They could have an RFP come out for a whole new contract for the entire combined company. We think there’s always when you have a situation like this, this would be new ground if Chrysler and GM got together. I think they’ll probably try to have less disruption in their benefit plans and they could just keep us and keep the existing PBM’s where they are for the remainder of the time, extend the contract.
Then you have also the VIBA coming up in 2010 so there’s a lot can happen we’re not that worried about it. I think it will play out and we’ll be in contention to grow some and there will be puts and takes just like in the financial industry. The financial industry has some consolidation. We won some, we lost some but at the end of the day we don’t think it’s a big issue for us.
Your next question comes from Lisa Gill – JP Morgan.
Lisa Gill – JP Morgan
When you think about the PBM’s and we think about the fact that next year should be kind of net neutral on the selling season. As a follow up to Tom’s question it appears that you have won more mail. Should we expect that there will be more profitability in 2009 around the PBM’s? Forget revenue for a minute; let’s think about the profitability of the contracts that you’ve brought on.
Secondly, when you think about 2009 are we seeing any changes in plan design at this point around mandatory mail, around specialty pharmacy and other areas that could also enhance profitability? Lastly, when we think about where you are on private label where can it go to? It’s at a little over 15% at this point realistically where do you think it can get in the next couple of years especially if the economy stays where it is?
Our private label is about 15% plus. We think it can grow 18% to 20%. In our private label we include the proprietary brands; Life Fitness or Cristophe or all of the other Nuprin, brands that we carry. I think our merchants and our operators have really done a great job finding these unique brands. To your point a consumer who is really brand loyal in this economy has tried private label and we think the quality of our private label is pretty good and they’ll come back and use it. We continue to see that growing.
As far as plan design we are getting some uptake on this maintenance choice obviously and we’re seeing it, we’re seeing some companies maybe look to some limited networks not quite as much but more on the maintenance mandatory mail piece of the business we think that the clients are reaching out for that and looking for new ways. Everybody’s under pressure, they’re looking to reduce costs, they’re looking to find new ways that can engage their consumer, engage their employee. That’s our model.
We’re trying to make sure that we engage those employees and engage the benefit manager in this discussion that’s why we’re using the Extra Care health card. We’re focusing on mailings on disease states. We’re giving them discounts on over the counter items and looking for new ways to save money and reduce their overall healthcare costs. We do think there is some movement in some of these plan designs.
As far as the PBM I mentioned earlier to Tom that we obviously have a higher portion of our clients that use mail so we should see more mail penetration. I’m not going to give guidance on the PBM yet; we’re going to give that later as we alluded to in February.
Lisa Gill – JP Morgan
Can you give us an idea though as far as any of the other programs that obviously are better margin; specialty were you able to sell through specialty to some of the accounts that you brought on?
We saw our specialty book of business across and we’ve had success selling the Caremark specialty business across the old Pharmacare business so there’s some uptake on that. Then there’s uptake on the other programs that we’re putting in. Once again this is about, you can see, you can look at our inter-company elimination on a revenue standpoint it’s increased.
It’s increased because we’re gaining more share of the PBM client spend in total CVS Caremark whether its in the mail side but in this case its on the retail side. Overall we think net net it’s beneficial for the corporation. We’ll give you the guidance on a go forward basis.
Your next question comes from Ed Kelly - Credit Suisse.
Ed Kelly - Credit Suisse
It looks like your September front end comp was probably up about 4% if you back into the numbers. The question really is, is that right and clearly it’s very good relative to your competitors. Could you maybe just help us understand what you think is driving that?
We think obviously the promotional strategy, our Extra Care loyalty card program, our execution in the stores, our private label products. We continue to take share when you look around from our competitive set. It’s about store hours, it’s about being in stock, it’s blocking and tackling that our front end comps are where they are today. It’s doing retail’s detail. I think our merchants, marketing team and our operations group have just done a good job. You just go in the stores you see it. I tell you our customer service metrics at retail are the highest they’ve ever been.
The consumer is obviously trying to combine their shopping patterns; they’re trying to save on gas. We’re close to the majority of our consumers. Don’t forget our average ring is only about $11 in the front end of our store. Consumers are reaching out to what we have in the store.
Ed Kelly - Credit Suisse
I know you typically don’t give ’09 guidance this early but could you maybe help us out qualitatively given the economic concerns. How confident are you that your current retail strength will continue into next year?
We don’t give out the guidance but I think you can tell tonality we feel pretty good about our business. The retail side, you mentioned the front end of our business. If you look at our numbers and look at where we are I can’t predict the economy, who knows what’s going to happen with unemployment. If unemployment goes to 12% you’ve got a different ballgame. If it stays at 8% that’s another story. Given that where we are vis-à-vis our peers and where we are in the market we feel pretty good about our retail front end sales.
Your next question comes from [David Meel] – Morgan Stanley.
[David Meel] – Morgan Stanley
I appreciate the commentary on the Part D plan and I wonder if you could put it into come context for us. You said it was going to be up slightly in terms of profitability next year. What was the comparison ’06 to ’07 was it down year over year?
It was up ’07 to ’06.
[David Meel] – Morgan Stanley
If you look at the Longs PDP and the SilverScript PDP how do those track as you went through the bid process how did those track relative to your expectations?
Longs changed some of their bidding in ’08 some of the changes that we made for the ’09 season they actually change them for the ’08 bidding season. Right now we’re pretty close to each other. We track to our expectations both ours and theirs.
[David Meel] – Morgan Stanley
There’s been some chatter in the industry that for example Walgreen’s bought a tremendous number of files from independents for example in their most recent quarter. Are you seeing an up tick in file buying activity?
No not significant. We’ve been doing file buys for a number of years. I think that’s obviously an opportunity on a go forward basis. The independents that are out there and left are obviously the better ones. The price of poker has gone up a little bit for the file buys. Having said that there are still great returns. Give the economy and what’s happening size and scale are important. I think we are going to have some opportunities going forward on file buys. We haven’t seen any significant uptake quarter to quarter.
Your next question comes from John Heinbockel - Goldman Sachs.
John Heinbockel - Goldman Sachs
How much opportunity is there in skew rationalization at the front end and in general doing a better job of reducing working capital and inventory and having that drive ROI a little bit more?
That’s an ongoing process for us. We continue to do it. I think you know that obviously our front end biz stores are a little smaller than maybe our number two competitor. We’ve done some rationalization over the years and it’s a continuing process. I think we have some opportunities obviously at Longs, Longs had started that process, we will continue it. We’re always looking at the profitability and the productivity of our own stores and our core stores. We’ll continue to do it and I think there will be some opportunities on a go forward basis.
John Heinbockel - Goldman Sachs
Where do you guys think you can get inventory turn to? I know you had goals in the past and you’ve met most of those. Can you improve turns another full turn or more, where can that go to?
We’re continually working on the turns. You know a significant amount products in our stores sell less than a piece a week. You have to have a full assortment. The classic example is beauty and skincare. We focus a lot on beauty and skincare because that’s our retail customer. You can’t just have the top four shades. You have to have a lot of inventory in those items for shelf presentation and just for the consumer to feel like you’re deep in that category.
Having said that, I think we have opportunities in both the pharmacy and also the front end of our store and over time I think we can get it up over five times.
Your next question comes from Robert Willoughby - Banc of America.
Robert Willoughby - Banc of America
Do you all break out the percent of your PBM revenues that are actually tied to the Medicare program in the aggregate? Secondarily, looking at the mail scripts it looks like the even adjusted for the FEP it was off a bit sharper sequentially then what we saw in the second, then what we saw in the first which would be opposite trend I would have expected. Is that the evidence then that you are moving share to that retail environment or is there something else afoot there?
We don’t break out the PBM the Med D business on the PBM side. As far as the mail business goes, mail utilization is being impacted like retail. We’ve got changes from the Zyrtec changes but our growth, FEP growth we had in the third quarter ’07 was impacted us and so we’re comparing it to that. You’re comparing the ’08 growth to the ’07 growth. Our mail business is tracking where we are.
If you look at our top players, our mail business our top clients, our mail business is growing. Then obviously the impact of generics also drops the mail sales. There’s no doubt about it the mail business across the country is feeling the same pressure that the retail scripts are. It impacts them both. We have obviously the added comparison the FEP growth that we had.
Robert Willoughby - Banc of America
It’s not a severe drop off, I would have expected nominal increase but it’s not severe enough to make too much noise about. Did you break out a mail penetration for your Medicare book of business I assume that would tick up over time though?
No, we don’t break it out. It’s not really that significant for that group. It may be over time as the government looks to change things but right now it’s not that significant.
Your next question comes from Deborah Weinswig – Citi.
Deborah Weinswig - Citi
Can you talk a little bit about the beauty business and specifically beauty 360?
We continue to grow share in our beauty business even in this economy. Our beauty business is up. It slowed a little because of the economy but if you look at our share of the beauty business we continue to grow share faster than any of our competitors. Once again I think our teams have done just a great job in merchandising and marketing of unique products and also the in store customer experience. We’re testing two stores and reiterate this is a test to see if we can get a different mix of products in our stores that are currently not available perhaps in retail drug stores.
We’re going to try one on the east coast, one on the west coast and maybe a few in the Longs acquisitions because its kind of the customer that we want. They also have the size of the store that we can do it in. Its early, actually we’re having the grand opening one of our stores I think this Monday coming up in DC. We’ve got the attention of some manufacturers and we’re looking at seeing where the opportunity and for us the issue is how big can it be.
In a company our size it’s got to be material either add another reason for the consumer to shop our store or be significant on a stand alone basis. That’s what we’re going to measure.
Your next question comes from Matt Perry – Wachovia Capital Markets.
Matt Perry – Wachovia Capital Markets
You talked about your Medicare Part D business running maybe a little behind plan in ’08 and raising prices in ’09 then you also mentioned you expect to pick up some dual eligible in ’09. Some of the HMOs have had some problems making that dual eligible population work for them and profitable. I’m just wondering how do you feel about taking on those members in ’09 and did your price increases benefit changes also include any kind of formulary design changes?
Compared to some of the managed care players in the marketplace we actually make some money on the duals. We make it significantly because of our PBM. Keep in mind to get the Med D we’ve got SilverScript which is the insurance part then we have a PBM business with services SilverScript that makes up our total Med D business. Sometimes what happens in the managed care player they’re looking at just the insurance part of the business and we obviously have two components.
It’s pretty profitable for us, it’s reasonable. I think it’s obviously saving the consumer money and in the marketplace I think it showed that the free market worked in the Med D environment. People are bidding it; companies are bidding it the governments getting the benefit of it and the consumers benefiting from it. From our standpoint it’s a profitable business overall the Med D business overall. You can’t just separate the two pieces you’ve got to look at it overall for us.
Matt Perry – Wachovia Capital Markets
Maybe it’s premature to give a full answer to this but you talked about the Extra Care card going to some of the Caremark PBM customers. Have you noticed among those customers who have picked up that card can you give any number behind maybe what percentage or more scripts they might fill in CVS stores now versus before?
I don’t want to break out the numbers but we have four million out there and we’re going to roll another six million out in ’09. We wouldn’t be doing that if it wasn’t positive for the company.
Your next question comes from Eric Bosshard - Cleveland Research.
Eric Bosshard - Cleveland Research
Retail profit growth in the quarter was 30% I think last quarter it was 20% that sounds like you’ve also cycled most of the buying synergies from putting the businesses together. Can you give a little more color behind how you’re generating such sizeable profit growth out of the retail business and the sustainability of that as well?
The profitability at retail has improved as we have seen better gross margins on each piece of that business. We’ve had a continuing drive to contain SG&A costs that’s been increasingly successful. We have seen generic drugs come into the market more importantly in quarter three then earlier in the year. Obviously we’re getting the wrap around of the generics from earlier in the year. As Tom pointed out in his remarks increasing penetration of private label in the front store part of our business private label is decidedly more profitable than the related branded items.
All of those things have been very beneficial and obviously we’re running at the full level of synergies now in comparison to last year we had quite a lot of it in the third quarter last year as well.
So you’ve got a combination we keep getting profitable, we’re managing our gross margin in the front end, you get better shrink improvement, you get better generic penetration, better private label penetration. Then we’ve got the synergies that are the full impact of the synergies in the quarter versus last quarter.
Eric Bosshard - Cleveland Research
Any comment at all about the sustainability of growing profits?
In the front end?
Eric Bosshard - Cleveland Research
In the overall retail, you’re just growing profit so much faster?
I wouldn’t expect 30% growth forever.
We have pretty decent margins. In the front end of our business and in the pharmacy end and we’re doing it basically on our ability to buy. We’re doing it on our ability to maintain a low SG&A. We’re driving generics. You don’t expect to see those kinds of increases. A lot of that obviously was the synergies. Having said that we don’t back up to feel bad about our margins in the retail side of the business we think that they’re pretty good and they’re holding their own. In fact in this environment we think they’re really good.
Eric Bosshard - Cleveland Research
On Longs could help explain the difference in the dilution in ’09 and the accretion in 2010 what is the assumed change between those years? I’m wondering within ’09 if there are some integration expenses that impact the contribution of the business?
Yes there certainly are. If you think about it from a modeling standpoint for a minute the one time and integration costs pretty much happen in the first year. In this case we’re closing at the end of October so we’re picking up two months in ’08 and 10 months of the first year in ‘09 so that’s why you’re seeing two periods of dilution. There are integration expenses; first of all they’re transaction costs that include legal, banking, severance costs, change of control costs, 280G costs, and retention bonuses stuff like that some of which goes to the P&L some of which goes to goodwill.
That aggregates in this case something over $200 million. Some of that will be in ’08, some of that will be in ’09. We’ve got integration costs that aggregate in this case something over $100 million that will go on mostly in 2009. Those things are affecting those comparisons. If you strip those out you’d see a very different picture in terms of the kinds of EPS performance that we’d be projecting.
Your next question comes from Meredith Adler – Barclays.
Meredith Adler - Barclays
I’d like to go back and talk a little bit more about the PBM at the end of the second quarter there was some amount of net new business that had been won and I believe that most of what was going to come in, in the third quarter was related to smaller contracts. Could we talk a little bit about kind of what happened did you not win as much small new business?
Obviously because you had some net new business in the end of the second quarter something must have been lost. I don’t expect you to name specific contracts but just talk a little bit about kind of what happened between second and third quarters.
I’m not clear on the question. We had some losses obviously but we had more wins then losses so I’m might misunderstand your question.
Meredith Adler - Barclays
I thought you said that net new business for ’09 would be flat?
Yes, net new revenue, on a revenue basis but actually you think about if you lose Coventry and Med D business which was a big number and then you have Empire which was announced a year ago with the WellPoint deal. From that standpoint you had two or three accounts that were pretty large. We also had added 90 accounts. We signed up more accounts then we lost. Significantly more than we lost but on a revenue basis its net net.
Meredith Adler - Barclays
Maybe I’m guiding this wrong but I did think that revenues were at the end of the second quarter net up even after Coventry and Empire.
We actually only commented on the first 12 months revenue that we had captured within the selling season. We tried to be clear that that was not the same as impact on 2009. We wanted to see kind of the play out of the rest of it before we gave you an impact on 2009.
Meredith Adler - Barclays
Someone else asked this question about scripts especially mail scripts but maybe could you just talk about are you watching closely what’s happening in terms of layoffs or impact on some of your larger corporate customers and what that might be doing to the PBM business and is there any indication to you that we’re seeing an accelerating case of layoffs that’s going to impact and obviously eventually impact retail pharmacy as well.
As I said earlier all the items that I alluded to around the reasons for the slow down in prescription growth applied to the mail business. The Zyrtec, therapeutic classes around drugs that had black box warnings etc whether it’s a diabetic drugs, anti-depressants. I think it’s an economic issue there’s some stretching as I said earlier and there’s some people are just self medicating.
We haven’t seen a significant loss on the layoff piece yet. Obviously we’ll track it as companies begin to layoff, what happens to their benefit, how long do they keep on with COBRA when can they keep getting the prescriptions. We haven’t seen a significant piece of the business right now laying off believe me we do follow it and track it closely.
Meredith Adler - Barclays
Would there be any intention to communicate some of what you’re seeing as ’09?
Sure, absolutely. If we can quantify it. The numbers get so big if you have a few companies have some layoffs and 1% of their workforce what’s the direct impact on scripts for that, it’s kind of hard. We can give you something directionally about it but it’s hard to kind of give you some real numbers but we’re tracking them.
Meredith Adler - Barclays
When you talk about profitability in the retail business there wasn’t specifically any mention of support from vendors. I was just wondering whether you’re finding the Extra Care card is something that vendors are continuing to like or liking even more than they used to and is that helping profitability?
Our vendors that’s one of the reasons the Extra Care card has been so successful and it keeps getting better and better because the vendors aren’t going to just give us money and support this that they’re not seeing some share growth in their own products. What we’ve done with technology and portals where the vendor can get in and look at the data they’re thrilled with it.
They can target market better than they can before. Readership is down in newspapers and it’s a challenge whether it’s TV or newspapers to get consumers and break through the noise in the marketplace. What we’re doing with Extra Care card is actually helping them. Short answer is they like it and they continue to support it.
Your next question comes from Neil Currie – UBS.
Neil Currie - UBS
You commented on the OTC impact on pharmacy comps I wonder if you can just comment quickly on the OTC impact on front end sales and also the private label penetration.
We’re seeing them in our cough and cold business is up double digit year to date. We’re seeing the healthcare category in the OTC side up and private label up. People are self medicating, they’re trying I think because the economy has forced I guess its called economic step therapy. Before they go to the emergency room or go to the doctor they’re going to try to self medicate that’s the first step therapy. When they do it now they’re trying our private label products. We are seeing growth there when you look at it. As I said, I think it’s for that reason.
Neil Currie - UBS
Can you place a number on it for us?
It’s up in this environment. Our front end comps are strong but these are even stronger. It’s a fair amount of cough and cold activity out there but we can’t really quantify it.
Neil Currie - UBS
I know that December is a relatively easy comparison because last year the December comp was impacted by seasonal sales. Normally in December the seasonal percentage goes up quite significantly this is going to be a pretty awful December for retail. I’m surprised how confident you are for front end comps for the final quarter given the scenario. Can you give us some flavor as to why you’re so confident of comps and what you expect in December?
One is the comparison. We have an easier comparison to LY. Two, we’re taking share now in these quarters in a bad economic environment. I believe we’ll continue to take share in the fourth quarter in this economic environment. Three, I think our merchants and operators have done a great job in the buy. Once again we have small ticket items; we’re last minute shopping spot for the season. Our price points are right, I’m optimistic about it but listen if everything goes to hell in the hand basket in December for some reason obviously that would change.
If the comparisons weren’t as easy maybe we wouldn’t be as optimistic. I think when you take all three the comparison, the share growth that we’re taking and how we position the merchandising and sales plan I think I feel pretty good about it.
Neil Currie - UBS
The sale and lease back of loans any changes to the assumptions that you made at the time of the announcements of the acquisition and timing of it?
No, other than I think we said in the acquisition we don’t have to run out and do these sale lease backs we’re not under pressure to do it. David alluded to it a little earlier. We can hold on to these things and when the real estate market recovers we’ll go out and do it appropriately. We’re in no rush but nothing else has changed. We still feel great about the real estate that we’re going to have.
There are no further questions.
Thank you all and if you have any further questions you can call Nancy Christal.
This does conclude the CVS Caremark Corporation Third Quarter Earnings Conference Call. You may now disconnect.
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