Revenue Shows That Ceasing Tobacco Sales In Stores Is No Great Loss For CVS Health

| About: CVS Health (CVS)

Summary

Losing tobacco sales revenues is not a great loss for CVS Health because of the size of its TTM revenue.

Dropping tobacco will give CVS Health vast amounts of free advertising in the form of good public relations.

Ending tobacco sales will appeal to the most valuable retail customers: middle class soccer moms.

Ending tobacco sales could speed up checkout times, making CVS even more attractive to soccer moms.

CVS Health (NYSE:CVS), the drugstore chain formerly known as CVS Caremark, did not make a major sacrifice when it ended all tobacco sales at its stores early in September. If past trends continue, the retailer's revenue should continue to grow substantially without tobacco.

Losing tobacco will not be a major loss at CVS because the company reported a TTM revenue figure of $132.04 billion on June 30, 2014. That indicates the company could have made around $130 billion without tobacco sales. CVS Health can obviously survive without tobacco.

Nor would the loss of tobacco have a big impact on CVS's revenue growth. CVS reported a TTM revenue figure of $123.61 billion in June 2013. That means CVS's TTM revenue grew by $8.43 billion between June 2013 and June 2014. It also means that CVS's TTM revenue would have grown by $6.43 billion without tobacco sales.

To put it in contrast, Costco Wholesale (NASDAQ:COST) saw its TTM revenue grow by $4.71 billion between June 2013 and June 2014, rising from $104.89 billion to $109.6 billion. CVS would have reported a larger TTM revenue growth than Costco even without tobacco sales.

Lots of Free Publicity

Dropping tobacco was no great loss at CVS, but it makes a lot of sense from the standpoint of public relations and retail strategy.

CVS is trying to reinvent itself as a health company with plans to open 1,500 clinics in its stores by 2017. It would not look very good for a healthcare company to be selling tobacco a few yards from the clinic. Nor would it be helpful for the CVS doctor or nurse to tell a person to quit when cigarettes are for sale in the store.

The company will also get a lot of good publicity and free advertising from its decision. The move was mentioned on all the network newscasts and praised in major newspapers. CVS looks very good and gets its name out there without spending a cent.

No Tobacco Equals More Middle Class Customers

The move is even more important from the standpoint of retail strategy because it will play well with the customers CVS is more anxious to lure in: middle class soccer moms. The soccer moms will be the ones most likely to use the clinics and to shop at CVS's small box discount stores.

The mother that cares about her children's health will be more likely to go to a store that is not trying to sell cigarettes to her kids. Persons more concerned about health, namely women, are also less likely to go into a store that sells cigarettes. CVS is betting that the prescriptions, cough syrup, health spray, milk, and laundry detergent those soccer moms will buy will make up for the lost tobacco revenue.

There's also a class stigma attached to smoking; an analysis of data by Health Metrics determined that smoking rates are dropping fast in affluent communities but holding steady among the poor and working class neighborhoods. The middle class-the customers CVS wants-are less likely to smoke.

Those that are most likely to smoke are less likely to have a lot of disposable income to spend. CVS is trying to position itself as a middle class retailer, and it knows that dropping tobacco is an effective way to do that.

Targeting the middle and upper class makes sense because the Federal Reserve's Survey of Consumer Finances shows that incomes for the poorest 20% of Americans have fallen. CVS is attempting to push out those with less to spend and lure in those with more money.

Faster Checkout Times and Lower Operating Costs

The chain might have lower labor costs because of its "altruistic move," because nobody needs to watch the laundry detergent aisle or check the driver's licenses of persons that buy makeup. Tobacco products have to be fetched from a special location by an employee. Federal and state laws require employees to spend time verifying customers' ages when they buy snuff or cigarettes.

This could also lead to faster checkout times because clerks will not have to leave the register to get cigarettes for customers. Speeding up checkout times is important, especially to soccer moms that are always pressed for time. Faster checkout gives customers another reason to shop at CVS.

Taking tobacco out of its stores was a sensible move for CVS that will have little impact on its bottom line. One has to wonder if other retailers that target the middle class, such as Costco or Walgreen (WAG), will follow CVS's lead. If CVS demonstrates a major revenue growth over the next year, other retailers might also be tempted to get rid of tobacco.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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