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Widlitz: For CVS, a Clear Conscience Will Cost a Pretty Penny

Stocks in this article: CVSWMTRADWAG

CVS Caremark (CVS) is taking the generally accepted moral high ground and saying, "No more smoke with your Coke (KO)." The drugstore chain is pulling all tobacco products from their stores, effective Oct. 1 of this year.

At first glance, the move makes total sense. CVS is on the road to expanding health services, such as providing basic-care clinics and in-store consultations on such things as -- yes -- how to stop smoking. Among other things CVS also, for instance, encourages you to fill those close-to-expiring prescriptions. So it is clearly inconsistent for the store to also offer you a cancer stick in the check-out line.

Does this mean the pack (pun intended) will follow? The media, the president and the Twittersphere have all applauded CVS for doing the right thing. However, Wal-Mart (WMT), Rite Aid (RAD) and Walgreen (WAG) might all be too focused on the bottom line to just say, "no." While cigarettes are low-margin and a pain to sell, given regulations concerning age and so on, they do drive traffic.

In fact, CVS is estimating $1.5 billion in lost revenue from tobacco itself and an additional loss of $500,000 for add-ons that come with those sales. Let's hope the company is underestimating the lost-add-on results. While there may be a short-term goodwill effect among nonsmokers, the consumer has tended to have a short-term memory -- and, otherwise, convenience rules all.

Meanwhile, Family Dollar (FDO) and Dollar General (DG) are more than happy to take your Marlboro money. They are also hoping you will throw some Doritos, instant mac and cheese and breath mints into your basket along the way.

If you really think eliminating cigarettes won't matter, consider the following revelation from Dollar General's most recent earnings call (for the quarter ended October). CEO Richard Dreiling said that, during the quarter, 44% of cigarette buyers also purchased a substantial number of other products -- up from just one-third of cigarette buyers when the store began selling tobacco. "We're beginning to convert the cigarette customer into a shopper," he said.

That is called a convenience-market-share win. In this case, what many perceive as the moral low ground may produce the highest returns.

At the time of publication, Widlitz had no positions in the stocks mentioned.

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