Watching For Flu, Express Scripts Impacts CVS Caremark's Earnings

| About: CVS Health (CVS)

The second largest drug retailer in the United States, CVS Caremark (NYSE:CVS) will announce its Q4 earnings Wednesday, Feb. 6. It raised its earnings guidance for this fiscal year in December, hoping to build on the additional prescription business for its retail segment from Express Scripts-Walgreen impasse. The company has a set target on retaining 60% of the prescriptions gained from the dispute, and we will watch for the success it has had in achieving it. The company also stands to benefit from the epidemic levels of flu this season, which are expected to result in a higher number of prescriptions filled as well as increased sales from the record number of flu shots. The unexpectedly high demand resulted in the company running out of flu vaccines, which should translate into healthy sales.

CVS Caremark is an integrated pharmacy services provider and drugstore chain that competes with Walgreen (WAG), Wal-Mart (NYSE:WMT), and Rite-Aid (NYSE:RAD) in its prescription drugs, OTC drugs, and general merchandise segment. It competes with Medco Health Solutions & Express Scripts in the pharmacy benefits management segment.

Retail Business Benefiting From Express-Walgreen Fallout

During the first nine months of the year, CVS significantly benefited from the Walgreen-Express fallout, and its retail pharmacy revenues increased 7.5% year over year. The full impact of Express Scripts and Walgreen reaching an agreement will become apparent in the Q4 results, and we will look at the success the company has had in retaining the prescriptions it gained from the dispute. The company expects to retain around 60% of the customers it gained as a result of the impasse, and launched an aggressive discounts program for customers who sign up for its loyalty program. We will look for insights into the company's future plans to attract and retain customers from Walgreen.

Watch for the Impact of a Severe Flu Season

CVS has a large footprint in the U.S. and operates drugstores in about 7,400 locations. The wide footprint leads us to expect that the impact of flu on the same store sales would be positive and significant. Competitor Walgreen registered an impact of 1.4 percentage points in December 2012, and we expect the impact on CVS's sales to be similar.

We have a $49 Trefis price estimate for CVS Caremark.

Disclosure: No positions.