3 themes to watch as CVS has its first investor day since start of pandemic

People walk by a CVS Pharmacy store in the Manhattan borough of New York City.

Shannon Stapleton | Reuters

Covid tests and vaccines have drawn customers to CVS Health’s stores during the pandemic. On Thursday, the company will pitch investors on how it plans to use other health-care services to keep them coming back.

The drugstore chain and insurance company will hold its first investor day since the start of the health crisis. CVS CEO Karen Lynch and other top executives are expected to share the company’s financial outlook and business strategy.

CVS has turned itself into a health-care-focused company rather than just a retailer. Along with its large footprint of about 10,000 U.S. stores, it owns pharmacy benefit manager Caremark and health insurer Aetna. Many stores include urgent-care locations called MinuteClinics. And it is converting a growing number of drugstores into HealthHubs, a new store format that includes services from therapy appointments and yoga classes to diabetes management and sleep apnea screenings.

As of Tuesday’s close, CVS shares are up 36% this year. The stock finished at $92.93, up about 0.3%. The company’s market value is $122.63 billion.

On its third-quarter earnings call, CVS said it expects to earn between $7.90 and $8.00 per share this fiscal year, after adjustments, up from a range of $7.70 to $7.80 per share. It did not provide a specific outlook for next year, but said analysts’ consensus estimates for adjusted earnings per share of around $8.20 were within its anticipated range.

Here are three themes that investors will listen for Thursday:

Teasing out the Covid factor

Will high volumes of Covid-19 tests and vaccines fade or persist? Investors will listen for CVS’ latest outlook on how much the pandemic may shape demand for preventive care and hospitalizations in the coming months.

Covid-19 vaccines and tests have been a foot traffic and sales driver for CVS during the pandemic. Since the start of the global health crisis, the company has administered about 38 million Covid tests and 43 million Covid vaccines as of Sept. 30, the end of the fiscal third quarter.

CVS said in its third-quarter earnings call that that dynamic is expected to slow, even as Americans receive booster shots, children ages 5 to 11 get first-time doses, and people get tests to distinguish between Covid and a cold. The company projected vaccine and testing volume, which has generated over $3 billion in revenue in 2021, would drop by 30% to 40% in 2022. It said fewer shots and tests would mean a decline in front-of-store sales, too, as people skip trips that lead to purchases like shampoo, milk and a box of tissues.

On the other hand, falling Covid cases would help the company’s health insurance business. Fewer cases means fewer hospital stays. CVS Chief Financial Officer Shawn Guertin said in November on the company’s earnings call that Aetna’s costs ballooned and were higher than expected in the third quarter because of the delta variant fueling cases.

Since CVS reported its third-quarter earnings, vaccination rates have spiked again and several states have confirmed cases of the omicron variant — adding new uncertainty.

Fewer stores, but sharper focus

CVS is shrinking one of the most visible aspects of the company: its store footprint. Last month, CVS said it would close about 900 stores over the next three years — or roughly 9% of its locations across the country.

That raises questions about the role of the stores and how they fit into the company’s vision.

For investors, shuttering stores could be good news — if they are underperforming and aren’t driving many sales, services or prescriptions anyway. Yet the company will have to explain how it will make its remaining stores more relevant and profitable.

Some retail analysts have criticized CVS for sloppy, unremarkable stores. Neil Saunders, managing director of GlobalData Retail, said company must spruce up the look and feel of the stores or shoppers will go elsewhere.

Along with announcing store closures, CVS said it would have three different types of stores: One will offer primary-care services. Another will become a HealthHub. And a third will remain as traditional stores with pharmacies and everyday items like toilet paper, toothpaste and cold medication. It may share renderings and details about how they will operate at the investor day.

Michael Cherny, a health-care analyst at Bank of America, said in a research note that CVS will have to make sure it doesn’t lose prescriptions to competitors because of the closures. He said the company has a good track record of getting customers to transfer to nearby locations.

Based on the closures, he reduced the company’s fiscal 2022 earnings per share estimate from $8.24 to $8.23 and fiscal 2023 earnings per share estimate from $9.10 to $9.08. However, he increased the fiscal 2024 earnings per share estimate from $10.00 to $10.01, as he anticipates CVS will benefit from adding more services to stores that remain.

Doubling down on health-care services

Strep tests. Diabetes checks. Therapy appointments.

Those are just some services that CVS wants people to get at its stores. The company sees medical care as a frequency driver and a way to provide care to Aetna members at a lower cost. CVS may spell out new ways that it will weave together the insurance and drugstore sides of its business and explain how it will differentiate from competitors.

Lisa Gill, a health-care analyst at JPMorgan, said in a research note that she will listen for details about CVS’ push into primary care, such as whether it will buy or partner with a physician practice. She said she wants to hear more about how its HealthHub stores are performing compared with its traditional stores to prove whether that model is working. CVS is expecting to have about 1,000 of the HealthHub stores by the end of 2021.

CVS isn’t the only drugstore ramping up its health-care business, though. Rival Walgreens Boots Alliance struck a deal with VillageMD to open hundreds of doctor offices inside of its drugstores. It is now majority owner of the primary-care company.

Cherney said the retail side of Walgreens and CVS is under pressure as online and brick-and-mortar players steal away sales. The drugstore chains see providing health care at convenient, local stores as “an opportunity that is either untapped or undertapped,” he said.

And he said the drugstores could have a wider audience and more mindshare after giving many Americans a Covid test or a jab. Next time, they may think of CVS if they need a flu shot or an urgent-care appointment, he said.

“This is a big component of how they’re able to prove that they can service so many health-care needs across the country,” Cherney said.

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