CVS Rings Up Profits by Branching Out

To boost sales, small businesses should follow CVS's lead by expanding services and catering to budget-conscious customers.
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WOONSOCKET, R.I. (

TheStreet

) -- Amid all the cable-TV debate about the country's health care system, one important fact remains: No matter how budget-conscious consumers become, they will spend money to keep their families healthy.

One company reaping the benefits is

CVS Caremark

(CVS) - Get Report

, the country's largest provider of prescription drugs. Its retail stores, pharmacy-benefit services and health care clinics are thriving despite the sluggish economy.

Woonsocket, R.I.-based CVS announced its second-quarter earnings this week, and the news was surprisingly good. As companies from

OfficeMax

(OMX)

to

Harley-Davidson

(HOG) - Get Report

report drops in sales and earnings, CVS's said net income rose 14% as revenue increased 17% from the year-earlier period. Same-store sales rose 6%.

"This is shaping up to be a very good year and we expect an even better 2010," Chief Executive Tom Ryan said in a statement.

CVS outshined its biggest competitor,

Walgreen

(WAG)

, which has diversified into a similar mix of businesses. Walgreen's third-quarter earnings, released in June, were down 10% from the previous year.

So what is CVS doing right? The company has broadened its customer base by steadily increasing its services. It's also lowering costs by providing more generic drugs, which are in high demand among cash-strapped customers.

If you expand your company's offerings into other related services, you could see a similar uptick in sales -- but only if the new ventures are a logical outgrowth of your core mission.

CVS's pharmacy-benefit management service has been key to its success. As corporations throughout the country scramble to contain their health care costs, companies like CVS have jumped in to administer their drug plans. Whether an employee fills his prescription at a store or through the mail, CVS gets a cut of the revenue.

During the second quarter, CVS processed about 5% more claims than a year earlier by aggressively courting new clients.

The company has also focused on increasing its use of generic drugs, a win-win for CVS and its customers. Every time a CVS pharmacy dispenses a name-brand medication, the majority of the revenue goes to the company that made the drug. Every time CVS convinces a customer to switch to a generic drug, that revenue stays with CVS. It's also cheaper for the buyer, boosting sales.

That's why CVS touts its "generic dispensing rate" in earnings reports. This past quarter, generics sales increased in both its pharmacy-services division and retail stores; more than two-thirds of the drugs CVS dispenses are generic.

This year, CVS also benefited from the panic over swine flu. Revenue from store pharmacies rose almost 20% in the second quarter, due largely to demand for Tamiflu, the medication prescribed to prevent or lessen the symptoms of the H1N1 virus. Flu season will probably bring in more Tamiflu requests and visits to its stores' Minute Clinics, which provide shots and flu tests.

While CVS sees a rosy financial year ahead, it shouldn't discount rival Walgreen, whose shares have risen 28% this year to CVS's 20%. Walgreen is in the middle of a company-wide overhaul aimed at saving $1 billion a year by 2011.

CVS may have the upper hand while Walgreen's retools. But it will only keep growing if it finds new ways to convert casual shoppers into regular customers.

Though drugstores have diversified into food, clothing and toy sales, CVS hasn't lost sight of its central mission: dispensing the right drugs at the right price.

-- Reported by Elizabeth Blackwell in Chicago

.

Elizabeth Blackwell is a freelance writer based in Chicago. She is the author of Frommer's Chicago guidebook, and writes for the Wall Street Journal, Chicago, and other national magazines.