NEW YORK (TheStreet) CVS Caremark (CVS - Get Report) announced today that it will stop selling cigarettes and other tobacco products at its more than 7,600 stores across the United States by October 1, 2014.
Now, this is certainly applaud-worth from a public well-being standpoint--especially as this marks the first national pharmacy chain to take a step in support of the health and well-being of its patients and customers.
However, this is--contrary to what many think--a smart shareholder move. Skeptical? Here's why...
First, I trust that CVS management has done the math. While they are likely focused on making a positive statement, when making a big decision to, you have to consider they have thought about the implications to the bottom line. And, the benefit of the cigarette sales for their core demographic likely just isn't enough. After all, about 70% of cigarette sales are already controlled by the convenience store rather than the pharmacy market. And we know it's a low margin business, as dollar stores like Dollar General (DG - Get Report), which have seen increased traffic from selling tobacco, have also seen margin deterioration.
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CVS specifically stated in their release that the decision to exit the tobacco category does not affect the company's 2014 segment operating profit guidance, 2014 EPS guidance, or the company's five-year financial projections provided in its December analyst day. The EPS loss can be made up by incremental opportunities that are expected to offset the profitability impact.
Second, companies levered to healthier living tend to do well from a long-term shareholder return perspective. We have talked about this with the anti-obesity stocks longer-term (despite some volatility), like Whole Foods (WFM). Look at companies that have embraced "better world" initiatives including recycling at Starbucks (SBUX) and organic food at Chipotle (CMG). People like shopping at and consuming from companies that are working to make the world a better place. Not to mention the political and social gains to be had with a widespread media focus.
Third, this move helps align the company's overall strategy more cohesively. Remember CVS Caremark is the country's largest pharmacy healthcare provider following the merger of retail giant CVS with the pharmacy-benefit manager (PBM) Caremark in 2007. This hybrid retail-PBM model (the only real one of its kind, particularly after Walgreen (WAG) sold its PBM) will allow it to offer an integrated pharmacy service to clients. And CVS has emphasized its MinuteClinics, which are offered to offer preventive care treatment in low-cost settings.
Other positives? (1) The now-resolved Walgreen-Express Scripts (ESRX) dispute did have some latent benefits with Walgreen not recovering all of its lost customers. (2) It's a great Affordable Care Act (ACA) play, with 30 million more lives now coming onlinne, (3) CVS will benefit from the generic drug wave that continues and that should pick up in 2015...and benefits from joint venture with Cardinal Health (CAH) (4) It's a great baby boomer play--as an aging population has higher drug utilization. (5) CVS has a great loyalty program - it introduced its ExtraCare card in 2001, a significant lead versus competitors with over 70 million active members.
Now, CVS remains a buy. And if you want to play the cigarette traffic game, don't sell CVS.... Buy Dollar General, the best dollar store of the group, which started rolling out tobacco in 2013 and has seen an associated pick-up in traffic. They are completely different plays.
--Written by Nicole Urken in New York.
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