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CVS Alleviates Wal-Mart Worries

The pharmacy chain boosts its guidance after a strong September.
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The fear that Wal-Mart (WMT) - Get Walmart Inc. Report has instilled into drugstore investors showed signs of wearing off Tuesday after CVS (CVS) - Get CVS Health Corporation Report reported strong September sales.

The Woonsocket, R.I.-based pharmacy chain said its same-store sales, or sales at stores open for at least a year, rose 8.8% last month. Based on its results, CVS boosted its profit forecast for the third quarter.

Shares of CVS, which had shed 12% of their value since the beginning of September, were recently up 30 cents, or 1%, to $30.03, on nearly triple their average daily volume.

CVS' chief competitor,

Walgreen

(WAG)

, was gaining 49 cents, or 1.1%, to $43.58, as investors who have been scared off by Wal-Mart's plan to sell discounted generic drugs concluded they were missing out on something good.

"Wal-Mart seems to have taken a lot of investor enthusiasm out of these stocks, but I see this industry performing very well overall," says Barrington Research analyst Derek Leckow.

Wal-Mart, the world's largest retailer, announced a plan in late September to sell a month's worth of generic drugs for $4, a price that undercuts pricing at the pharmacy chains by a small margin.

The discount giant initially launched its plan, which covers 314 generic drugs, in the Tampa Bay, Fla., area. Last week, Wal-Mart rolled out the lower pricing to the entire state -- four months ahead of schedule -- and the company expects to eventually bring the plan to the entire country.

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"People are looking at this as a potential shift in the industry as it was when Wal-Mart entered other industries," says Leckow. "The difference is that Wal-Mart is not entering a marketplace with very fat margins, waste and lots of inefficiencies. You have a very highly efficient business model that these drugstore companies have perfected, and Wal-Mart's price differential is not very big.

"To me the whole issue is more of a headline risk than a real risk to the pharmacy business," Leckow adds.

Pharmacy chains have used their own efficiencies of scale to drive mom-and-pop drugstores out of business throughout the country, and investors have viewed companies like CVS and Walgreen as reliable retail businesses with plenty of growth potential.

CVS said September same-store sales at its pharmacies grew 9.8% while front-end, or non-pharmacy, same-store sales grew 6.5%.

Its total sales for the month jumped 24% to $4.4 billion from $3.5 billion last year. The sales were boosted by the June 2 acquisition of 701 Sav-On and Osco drugstores.

For the third quarter, the company's same-store sales jumped 9.1%, reflecting a 10.2% gain for pharmacy sales and a 6.4% gain for front-end sales. Total sales for the quarter increased 25% to $11.2 billion.

CVS said it expects to earn 31 cents to 33 cents a share for the quarter, up from its previous guidance of 28 cents to 30 cents a share. Analysts, on average, anticipated earnings of 30 cents a share, according to Thomson First Call.

For the full year, CVS raised its earnings forecast to $1.50 to $1.54 a share, up from a prior view of $1.47 to $1.51 a share. Analysts predicted a profit of $1.52 a share.

For its part, Walgreen reported last week that its September same-store sales rose 8.5% overall. Its pharmacy business recorded a 10% gain, while its front-end merchandise business logged a 5.6% increase. Total sales were up 15% to $4.03 billion.

Leckow gives shares of both companies an outperform rating.

"They're both doing what they promised and more," he says.