CVS to suffer $2B loss by kicking tobacco

When CVS (NYSE:CVS) opted to stop selling tobacco products in February, it was making a long term public relations and branding investment. With its first quarter since the announcement in the books, the upside has outweighed the down in regards to pharmacy sales, but there could be more to come.

Both profit and total revenue for CVS rose 11 percent last quarter, beating projections, while front-end sales were down 0.4 percent. The front-end is where cigarette sales are recorded, and while not all stores have chosen to stop selling them yet, it's estimated that segment of the business would have been 1.1 percent higher if all stores were selling tobacco. The company itself put its losses due to the tobacco decision in the ballpark of $2 billion over the course of the year.

The cut-off for all stores to cease cigarette sales is October, so that modest drop could well increase. And there is always the loss of other purchases cigarette buyers would have made to consider.

"My thought is that it will hurt them measurably beyond the $2 billion for some time to come," Ken Lonyai, digital innovation strategist, co-founder, ScreenPlay InterActive told Forbes back when CVS initially made its decision. "Lots of people pick up secondary items along with their smokes or get their cigs while picking up prescriptions. Those people will likely leave for competitors and it will take a while for replacement sales to catch—possibly years."

In lieu of tobacco products, CVS is investing more in programs to help customers quit the habit, and is currently waiting for guidance from the Food and Drug Administration to decide whether it will stock e-cigarettes.

In the meantime, the 0.4 percent drop in front-end sales has been offset by the growth of the back-end, specifically pharmacy. That segment drove a 5 percent rise in same-store sales for the quarter as pharmacies benefitted from both the Affordable Care Act and more expensive specialty drugs, forcing insurers to turn to the likes of CVS for more reasonable drug costs. The company's share of the prescription business is only expected to increase over the coming years, providing ample cover until customers get used to the idea of buying their cigs somewhere else.

For more:
-See this Barron's story
-See this Bloomberg story
-See this Forbes story

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