CVS raises expectations, says tobacco loss won't hurt earnings

CVS Caremark expects no loss of business and, in fact, upped its projections for the next quarter following the announcement the chain would stop selling tobacco products.

The drug chain announced fourth quarter earnings that beat expectations in its first report following the announcement last week it would phase out sales of tobacco products by 2015. CVS is the second largest drug chain in the U.S. after Walgreens.

CVS reported record fourth quarter and year-end results. Net revenues for the fourth quarter increased 10.9 percent to a record $31.4 billion from the prior year and full-year revenue rose 15 percent to $123.1 billion. The company also raised its guidance for 2014, in spite of a projected $2 billion loss of business related to tobacco.  

"The decision to exit the tobacco category does not affect our 2014 segment operating profit guidance, our '14 earnings per share guidance or our five-year financial targets," said Larry Merlo, president and CEO. "Our business is strong and we have near-term offsets to the profitability impact of this change. We strongly believe this decision will further strengthen our position as a healthcare leader, further differentiate us from competitors and better position the company for growth going forward."

The response to CVS's announcement regarding tobacco has been overwhelmingly positive, Merlo said during a conference call with analysts. And while the category accounts for nearly $2 billion in annual sales, there are currently no firm plans to fill the hole tobacco leaves in terms of store shelves or sales.

"Obviously, when you look at that 8 to 12 feet that tobacco commands today, okay, there will be something replacing that space," said Merlo. "To be clear, it's not going to make up $2 billion in revenues, but it will be something." CVS is conducting tests for replacement merchandise but did not provide further details.

Competitor Walgreens will continue to sell tobacco products. "(Walgreens) will continue to evaluate the choice of products our customers want, while also helping to educate them and providing smoking cessation products and alternatives that help reduce the demand for tobacco products," Walgreens spokesman Michael Polzin said in an emailed statement.

For more:
-See this CVS Caremark statement
-See this transcript from Seeking Alpha

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