CVS Caremark's tobacco exit is a numbers game


The decision by CVS Caremark (CVS) to stop selling tobacco products will add to profits despite the immediate hit to revenue from lost cigarette sales, according to analysts watching the sector.

Mizuho Securities sees a $0.16-$0.21 per share benefit right off the top if CVS renews a deal with the Federal Employee Health Program at the end of the year.

Other analysts have their eyes on recent trends showing CVS gaining momentum in improving its margins and supply cost reductions.

The savings from the tobacco exit start piling up even more if CVS wins more market share in pharmacy benefits management with its shift toward becoming a favored health services company.

What to watch: CVS trades with a valuation that is roughly on par with the S&P 500, but investors may be discounting its transcendent ability to grow profits through its evolution.

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Comments (42)
  • positivethoughts
    , contributor
    Comments (2064) | Send Message
     
    How much extra money will they garner if they get rid of chocolate, pop and potato chips? And what about all those high-sugar 'juice' drinks they likely sell?

     

    They should also get a net gain if they avoid selling anything breakfast related. Have you seen how much sugar is in cereal these days? Breakfast bars are another no-no.

     

    Cigarettes take up almost no space, are high demand items and draw people to the store to buy other products. Removing cigarettes will hit their earnings.

     

    CVS probably got some 'black budget' money from the federal government to initiate this move.

     

    If removing cigarettes was such a profitable move, every convenience store in the North America would have done it by now.
    15 Feb 2014, 11:05 AM Reply Like
  • rheimerl
    , contributor
    Comments (490) | Send Message
     
    agree!.. maybe obama gives them some back door cash...other than that they lose
    15 Feb 2014, 11:10 AM Reply Like
  • The Rebel
    , contributor
    Comments (2570) | Send Message
     
    I thought taxpayers were private citizens. I fail to get your point.
    15 Feb 2014, 06:59 PM Reply Like
  • Sakelaris
    , contributor
    Comments (2602) | Send Message
     
    I think he is saying that taxpayers are tired of paying for the cost of smoking. I know I am.
    15 Feb 2014, 07:07 PM Reply Like
  • The Rebel
    , contributor
    Comments (2570) | Send Message
     
    Well, I'm tired of paying for many of the liberal boondoggle programs that are leading the middle class to the poor house.
    15 Feb 2014, 07:18 PM Reply Like
  • Sakelaris
    , contributor
    Comments (2602) | Send Message
     
    Rebel: So am I!

     

    As I explain in one of my posts below, I am a generally conservative individual who also opposes tobacco.
    15 Feb 2014, 08:37 PM Reply Like
  • positivethoughts
    , contributor
    Comments (2064) | Send Message
     
    Smokers pay tremendous monies in taxes when they buy cigarettes. That money paid, given that it can easily earn 3x its original amount (even adjusted for inflation) over the lifetime of the smoker, means that smokers already pay fully for any cancer treatment might cost the healthcare system.
    15 Feb 2014, 09:24 PM Reply Like
  • positivethoughts
    , contributor
    Comments (2064) | Send Message
     
    In your world, every dollar should go to the government for program expenditures. Democrats never hear a tax and spend idea that they dont think will work out well. The problem is, you eventually run out of productive people's money.
    15 Feb 2014, 09:50 PM Reply Like
  • Rich in NJ
    , contributor
    Comments (81) | Send Message
     
    Not really, because every convenience store doesn't offer an in-house clinic or prescription and over-the-counter drugs while promoting a health model. So your analogy is falls of its own weight.
    16 Feb 2014, 12:56 PM Reply Like
  • DrP79
    , contributor
    Comments (2463) | Send Message
     
    given the change in lifespans associated with smoking, on FICA alone, smokers subsidize the rest of the public.
    16 Feb 2014, 10:28 PM Reply Like
  • Transcripts&10-K's
    , contributor
    Comments (1215) | Send Message
     
    "If removing cigarettes was such a profitable move, every convenience store in the North America would have done it by now."

     

    About 50% of cigarette sales in the US are at convenience stores; that compares to about 4% for retail pharmacies like CVS.

     

    Cigarettes accounted for less than 2% of CVS' annual revenue; on the other hand, cigarette sales account for ~38% of non-gas sales at convenience stores, per Bloomberg. Also, the estimates CVS put out for the impact from removing cigarettes included the impact from lost sales of other products; you should probably take five minutes and read the press release.

     

    Maybe instead of worrying about "black budget" money from the federal government, you should spend more time understanding the actual financials in question...
    17 Feb 2014, 08:13 AM Reply Like
  • wyostocks
    , contributor
    Comments (9113) | Send Message
     
    I'll bet that there is an under the table "deal" with the administration that will be "announced" in the coming months after the dust settles.
    15 Feb 2014, 11:47 AM Reply Like
  • The Geoffster
    , contributor
    Comments (4291) | Send Message
     
    I don't own CVS stock so I don't care that they quit selling tobacco products. I quit smoking years ago. As long as they keep selling whiskey and Vicodin, I'm good to go.
    15 Feb 2014, 11:51 AM Reply Like
  • wyostocks
    , contributor
    Comments (9113) | Send Message
     
    Geoffster

     

    I didn't know they sold booze. In what state do they do that?
    15 Feb 2014, 11:56 AM Reply Like
  • Randal James
    , contributor
    Comments (4415) | Send Message
     
    The problem with the idea that customers will have more disposable cash misses a key point: many states such as NY have taxed cigarettes so heavily that only the (ahem) die-hard smokers are left. Telling them they'll need to switch to licorice sticks or root beer barrels won't change the behavior, they will just find somewhere else to go. Even if all the pharmacies dropped cigarettes, which they might, there are 7-11's and independent tobacco stores that will fill the void.

     

    I'm not saying this is a bad policy, just that the + income notion is likely flawed. If you can imagine a state deciding to go 'dry', the likely result would be a nightly migration of drinkers to other states and a thriving black market. But it would be a pain to do so regularly and consumption would accordingly decline. But to say restaurants would do better after a liquor ban would be preposterous.
    15 Feb 2014, 11:56 AM Reply Like
  • Sakelaris
    , contributor
    Comments (2602) | Send Message
     
    It would be risky for convenience stores to stop tobacco sales, as they have built their business in part by establishing themselves as the tobacco source for most of the nation's smokers. It would be nice to see a brave, small convenience store chain experiment with some no-tobacco outlets, but that day might need to be some distance in the future.

     

    On the other hand, drug stores are different. They were never a major source of tobacco products, and so it will be easier to move away from that stuff. For CVS, the loss of 2% of its revenue can be made up by increased business from the sick-of-tobacco people (I am one of them) and related medical business. Good for CVS!

     

    The other big thing to attract comments is the fact that there are candy and other junk food items still to be sold at CVS. I believe that the danger from tobacco is much greater than the danger from those other items and the tobacco addiction danger is much greater as well. Millions eat the junk food items in moderation, while there are hardly any moderate one-cigarette-a-day smokers.

     

    Moreover, the complaint that junk food will still be available at CVS is essentially childish. It rests on the assumption that no evil should be addressed unless all evils are being addressed simultaneously. That world does not work that way. Most of the great advances in human well-being occurred because people were able to take on evils one-at-a-time.
    15 Feb 2014, 03:49 PM Reply Like
  • Jake2992
    , contributor
    Comments (1105) | Send Message
     
    "Moreover, the complaint that junk food will still be available at CVS is essentially childish."

     

    Obviously, this shouldn't need to be explained to anyone with a working brain, but conservatives well.....you know.
    15 Feb 2014, 04:03 PM Reply Like
  • wyostocks
    , contributor
    Comments (9113) | Send Message
     
    jake

     

    And if the food Nazis raided your kitchen I am sure they would find nothing but organic carrots. Good soldier that you are.
    15 Feb 2014, 04:17 PM Reply Like
  • positivethoughts
    , contributor
    Comments (2064) | Send Message
     
    Are you a liberal Jake2992? Because if you are, do you want to debate with me the concept of 'a working brain' and how it contradicts the entire 'liberal' political philosophy?.
    15 Feb 2014, 09:28 PM Reply Like
  • Sakelaris
    , contributor
    Comments (2602) | Send Message
     
    Since political labels are getting into this discussion, allow me to complicate the issue by stating that I consider myself conservative on most political issues--but having seen precious conservative ladies harmed by second-hand smoke, I am certainly on the anti-tobacco side as well.
    15 Feb 2014, 04:25 PM Reply Like
  • byobnet
    , contributor
    Comments (112) | Send Message
     
    Well I do own shares of this company and I am happy with the move and understand the reasons behind it.

     

    The junk food argument is plain silly on so many levels.

     

    One example: Most would agree there's a clear danger to the health of others from second-hand smoke.

     

    Any proof anyone has ever been put at risk of developing cancer, heart disease or stroke by just living in a home for years with a family member who eats a lot of chocolate, drinks a lot of coke or inhales a bunch of Twinkies?
    15 Feb 2014, 05:59 PM Reply Like
  • The Rebel
    , contributor
    Comments (2570) | Send Message
     
    "The junk food argument is plain silly on so many levels.
    One example: Most would agree there's a clear danger to the health of others from second-hand smoke."

     

    What about the clear danger to the health of those who smoke marijuana, which is quickly becoming legal in many states? Or the danger to the lives of those they come in contact with, whether on the city streets or on the highways? I guess the left-wingers in the Rio Linda's of the country don't care about that.

     

    15 Feb 2014, 07:16 PM Reply Like
  • Sakelaris
    , contributor
    Comments (2602) | Send Message
     
    This is a time you might want to review the point I made in a long post above in which I point out that each thing that might be seen as evil needs to be addressed separately. Therefore, do not muddy the issue of the clear dangers of tobacco by insisting that we first must all agree on all other issues of human behavioral choice, whether it be eating junk food, or, as you now bring up, the issue of marijuana.
    15 Feb 2014, 08:44 PM Reply Like
  • The Rebel
    , contributor
    Comments (2570) | Send Message
     
    You just made my point by bringing up human behavioral choice. It is not up to the government to decide what choices we can make in a free society, short of violating written laws. If we choose to be obese and overeat or eat unhealthy foods, that's our choice. If we choose to smoke, that's our choice. If we choose to drink alcohol, that's our choice. If we choose to live in hurricane-prone coastal areas, that's our choice. We then have to live with the consequences. The alternative is to have government regulate every aspect of our lives, which seems to be what they are intent on doing these days. I find it hypocritical that when the government is about to regulate or ban the outright sale of menthol cigarettes and thereby control or eliminate another of our society's free choices, they are more than willing to allow society the free choice of smoking marijuana. Sorry, but your argument of addressing evil behaviors, as you call them, separately, falls on deaf ears here.
    15 Feb 2014, 09:36 PM Reply Like
  • Sakelaris
    , contributor
    Comments (2602) | Send Message
     
    You probably also opposed the move over the last thirty-five years that sought to protect people from the danger and stench of second-hand smoke.

     

    Do not worry, there will still be plenty of convenience stores selling tobacco products. In fact, you can even celebrate the recent decision of Dollar General to carry tobacco. I am glad that a message is at least sent that health-oriented places recognize the dangers of tobacco.

     

    In addition, CVS is probably going to reduce the toll that all stores endure from shoplifters and panhandlers by its recent decision.
    16 Feb 2014, 04:14 AM Reply Like
  • The Rebel
    , contributor
    Comments (2570) | Send Message
     
    You've got it all wrong. My son smokes, but is not allowed to do so in the house. No second-hand smoke here. But that is a decision made by me, a private citizen, to control the second-hand smoke danger. We don't need the government forcing regulations upon us to control things that we can deal with as private citizens and private companies. If CVS wants out of cigarettes, good luck to them. Just keep the government out of it.
    16 Feb 2014, 04:11 PM Reply Like
  • Sakelaris
    , contributor
    Comments (2602) | Send Message
     
    I hope no one else is exposed to your son's second-hand smoke and that you feel a moral responsibility to inquire about that.

     

    Hearing or reading libertarian arguments is intriguing, but it gets tiring after a while.

     

    If a libertarian was to get a job as a Bible translator, I suppose Genesis 4:9 would go like this:

     

    Then the Lord said to Cain, "Where is Abel your brother?"

     

    Cain said, "I do not know. What are we doing here, running some kind of nanny state?"

     

    Anyway, I suppose that is the last comment I need to make in the direction of the Rebel.
    16 Feb 2014, 05:12 PM Reply Like
  • JohnBinTN
    , contributor
    Comments (4372) | Send Message
     
    Sakelaris,

     

    The 'real' Bible says "None is righteous, no, not one;" That would include you, no?

     

    If you use petroleum-based products (which you do), you are living in a glass house and casting stones at your neighbors.
    16 Feb 2014, 05:38 PM Reply Like
  • positivethoughts
    , contributor
    Comments (2064) | Send Message
     
    Which 'God' is the real 'God'? Of the 5 major religions, which one is the 'real' religion?

     

    If you believe in any of the 5 majors, you have to admit that the other religions you dont believe in are fake, mental fantasies. Yet, those same people who declare the 'other' 4 religions as fake, mental fantasies, still think their religion is the real one. It doesnt make any sense.

     

    If I met 'God', I would tell him he is the one who is sinful and imperfect. He is the one who has caused the most trouble in the world, not me.
    16 Feb 2014, 06:01 PM Reply Like
  • Sakelaris
    , contributor
    Comments (2602) | Send Message
     
    To borrow from my junk food-related comment from an above posting, your petroleum complaint rests upon the assumption that no evil should be addressed unless all evils are being addressed simultaneously. The world does not work that way. Most of the great advances in human well-being and justice occurred because people were able to take on evils one-at-a-time.
    16 Feb 2014, 06:15 PM Reply Like
  • JohnBinTN
    , contributor
    Comments (4372) | Send Message
     
    Easy enough for you to say, as you are a non-smoker. I hope you maintain the same attitude when it is one of YOUR freedoms that you enjoy that is regulated away.
    16 Feb 2014, 06:24 PM Reply Like
  • The Rebel
    , contributor
    Comments (2570) | Send Message
     
    "Anyway, I suppose that is the last comment I need to make in the direction of the Rebel. "

     

    Thank God.
    16 Feb 2014, 11:00 PM Reply Like
  • King Rat
    , contributor
    Comments (1624) | Send Message
     
    Let's start from the top. Tobacco has several complementary products such as lottery tickets, alcohol, and related junk food. Cutting tobacco may likely cut sales of some of the other products. CVS will lose money on this.

     

    What CVS did was make a decision that many would say "is a step in the right direction".
    What is sad is that the very people who say "that's a step in the right direction" are complaining that CVS "did not take 2 steps" or "the step is misguided by bad intentions" or "it's part of a conspiracy".

     

    What if a cookie is just a cookie. CVS could not sell tobacco in good conscience so stopped. Nothing more, nothing less. Sometimes you realize you can't keep doing what you are doing if you got paid $10million a day. When you stop doing it you feel that much better. So may be the case with CVS.
    15 Feb 2014, 08:36 PM Reply Like
  • positivethoughts
    , contributor
    Comments (2064) | Send Message
     
    But someone who wanted to act based upon conscience would obvioulsy stop selling sugar products like chocolate bars, pop and cereal, along with the disconintuation of cigarette sales.

     

    If I took a large group of people and gave each one of them a chocolate bar and a can of pop every day until they reach the age of 50, I guarantee you half of that group of people would have diabetes or other major health problems as a result. Sugar is an EXTREMELY poor nutritional choice, especially in the amounts found in sugar products sold in places like CVS. A can of Coke is 13% sugar - 42 grams. The average chocolate is about 45% sugar, or 22 grams. With just those two items, a CVS customer would be consuming twice the daily recommended amount of sugar. And sugar is also addictive, just like nicotine.

     

    I am certain CVS got some sort of 'black buget' money from the government to do this. People mocked me when I made the accusation about the NSA and tech companies, but it was recently announced that Microsoft, Google, Apple etc. did receive money to help the NSA spy.
    15 Feb 2014, 09:45 PM Reply Like
  • positivethoughts
    , contributor
    Comments (2064) | Send Message
     
    No wonder people cant be convinced of the 9-11 cover-up. Even this CVS ploy is too much for people to rap their heads around.

     

    Here is a noodle to chew on, for everyone:

     

    Isnt it odd that the U.S. wasnt able to track the planes on 9-11, simply because the 'hijackers' turned off the planes' respective transponders?

     

    Exit Question: If we cant track commercial planes flying at such slow speeds over the east coast because we arent able to do anything other than pick up transponder signals, how can we track any military threat from Russia, China, North Korea or the like?

     

    The government's explanation of 9-11 is obviously false to anyone with even an ounce of intelligence.
    15 Feb 2014, 09:56 PM Reply Like
  • JohnBinTN
    , contributor
    Comments (4372) | Send Message
     
    PT,

     

    You were doing so good until the 9/11 stuff...
    15 Feb 2014, 10:01 PM Reply Like
  • Sakelaris
    , contributor
    Comments (2602) | Send Message
     
    To JohnBin: You have to expect some of that other stuff when dealing with the extreme pro-tobacco line.
    16 Feb 2014, 04:29 AM Reply Like
  • jgbrowning
    , contributor
    Comments (410) | Send Message
     
    (9/11 cover up and suger=tobacco)

     

    Heh. Hehehehehehe...
    16 Feb 2014, 09:03 AM Reply Like
  • berniespear
    , contributor
    Comments (251) | Send Message
     
    How does not selling cigarettes give you more proift? Seems cigs are good sellers and like someone said, take up no space.

     

    Anyone explain how profits rise?
    16 Feb 2014, 02:26 AM Reply Like
  • Sakelaris
    , contributor
    Comments (2602) | Send Message
     
    Tobacco is very profitable for places that focus on it as a major part of its business. Over the years it was convenience stores that got that business, not the drug stores. That is why I believe it will not hurt CVS to give up tobacco (just 2% of its revenue) as it focuses a little more upon the health side of its business. As I pointed out above, CVS could even lose shoplifters and panhandlers as well.

     

    Tobacco users will still have options of places to go. So will tobacco-loving investors; try Dollar General.
    16 Feb 2014, 04:24 AM Reply Like
  • mpvroadrunner
    , contributor
    Comment (1) | Send Message
     
    Gross margins will be positively impacted as cigarette products usually are a very low margin category, typically in the 10%-15% range. Cash flow will also be positively impacted especially in highly taxed states. A case of premium brand cigarettes in NYC at retail can be as much as $3,000 (30 cartons @ $100 each per case). A store can easily hold $75,000+ worth of on hand inventory on an every day basis. CVS will also reduce tobacco theft. Historically cigarettes are highly a pilfered commodity. Even low shrink rate stores at 1% or less will be worth tens of millions of dollars in savings every year. This truly was a great move by CVS.
    16 Feb 2014, 09:27 PM Reply Like
  • positivethoughts
    , contributor
    Comments (2064) | Send Message
     
    Gas station owners make more money than convenience store owners, yet convenience store owners operate at higher margins. It's about total dollars at margin.
    16 Feb 2014, 09:53 PM Reply Like
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