CVS 1998 Annual Report Download - page 17

15
1998 Financial Report
Merger Charges
During the second quarter of 1998, we recorded a $158.3
million charge to operating expenses for direct and other
merger-related costs pertaining to the CVS/Arbor merger
transaction and related restructuring activities. At that time,
we also recorded a $10.0 million charge to cost of goods sold
to reflect markdowns on noncompatible Arbor
merchandise.
During the second quarter of 1997, we recorded a $411.7
million charge to operating expenses for direct and other
merger-related costs pertaining to the CVS/Revco merger
transaction and related restructuring activities. At that time,
we also recorded a $75.0 million charge to cost of goods sold
to reflect markdowns on noncompatible Revco merchandise.
Integration Update
We are pleased to report that the integration of Arbor is well
underway. We have already converted Arbor to CVS’
accounting and store systems and closed the Troy, Michigan
corporate headquarters facility. With respect to merger
synergies, we achieved approximately $20 million of cost
savings in 1998 and we believe we are on track to realize at
least $30 million of cost savings in 1999 from the Arbor
merger. Please read the “Cautionary Statement
Concerning Forward-Looking Statements” section below.
We are further pleased to report that the integration of
Revco is now complete and we have accomplished our goal
of achieving at least $100 million of annual cost savings
from the Revco merger.
Where You Can Find More Information
About the Mergers
Please read the “Results of Operations” and “Cautionary
Statement Concerning Forward-Looking Statements”
sections below and Notes 2 and 3 to the consolidated
financial statements for other important information
about the mergers and the nonrecurring charges that we
recorded.
Results of Operations
Net sales increased 11.1% in 1998 to $15.3 billion. This
compares to increases of 16.2% in 1997 and 12.5% in 1996.
Same store sales, consisting of sales from stores that have
been open for more than one year, rose 10.8% in 1998, 9.7%
in 1997 and 8.9% in 1996. Pharmacy same store sales
increased 16.5% in 1998, 16.5% in 1997 and 13.5% in 1996.
Our pharmacy sales as a percentage of total sales were 58%
in 1998, 55% in 1997 and 52% in 1996. Our third party
prescription sales as a percentage of total pharmacy sales
were 84% in 1998, 81% in 1997 and 80% in 1996.
As you review our sales performance, we believe you should
consider the following important information:
•Our pharmacy sales growth continued to benefit
from our ability to attract and retain managed care
customers, our ongoing program of purchasing
prescription files from independent pharmacies and
favorable industry trends. These trends include an
aging American population; many “baby boomers”
are now in their fifties and are consuming a greater
number of prescription drugs. The increased use of
pharmaceuticals as the first line of defense for
healthcare and the introduction of a number of
successful new prescription drugs also contributed to
the growing demand for pharmacy services.
•Our front store sales growth was driven by solid
performance in categories such as cosmetics, private
label, seasonal, vitamins/nutrition, greeting cards,
skin care, film and photofinishing, and convenience
foods.
•The increase in net sales in 1998 was positively
affected by our efforts to improve the performance of
the Revco stores. To do this, we converted the
retained Revco stores to the CVS store format and
relocated certain stores. We are pleased to report that
we are seeing improvements, especially in front store
sales. However, the improved performance has been
aided by temporary promotional events and the rate
of progress has varied. We expect it to continue to
vary, on a market-by-market basis.
•The increase in net sales in 1997 was positively
affected by our acquisition of Big B, Inc., effective
November 16, 1996. Excluding the positive impact of
the Big B acquisition, net sales increased 11.3% in
1997 when compared to 1996. Please read Note 2 and
Note 3 to the consolidated financial statements for
other important information about the Big B
acquisition.
•We have an active program in place to relocate our
existing shopping center stores to larger, more conve-
nient, freestanding locations. Historically, we have
achieved significant improvements in customer count
and net sales when we do this. The resulting increase
in net sales has typically been driven by an increase in
front store sales, which normally have a higher gross
margin. We believe that our relocation program offers
a significant opportunity for future growth, as 23%
of our existing stores are freestanding. We currently
expect to have 35% of our stores in freestanding
locations by the end of 1999. Our long-term goal is to
have 70-80% of our stores located in freestanding sites .
Condition and Results of Operations