CVS 1998 Annual Report Download - page 5

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TO OUR SHAREHOLDERS
VS reached new heights in 1998 by virtually
every measure, including customers served,
prescriptions filled, stores operated, sales and
earnings generated, and return to shareholders.
We are particularly proud that we achieved excel-
lent financial results and maintained our focus
during a year of tremendous activity for CVS, as
we successfully integrated our acquisitions of
Revco D.S., Inc. and Arbor Drugs, Inc.
Record Sales and Earnings Lead to
Dramatic Growth in Shareholder Value
Our commitment to serving our customers
has led to results that are at the forefront of our
industry. Total sales in 1998 reached a record
$15.3 billion, an increase of 11.1% from the $13.7
billion reported in 1997. On a comparable store
basis, sales rose a healthy 10.8%, with pharmacy
same store sales climbing 16.5%.
Operating profit, before the effect of non-
recurring charges, advanced a robust 20.7% to
$940.5 million in 1998, driven by higher compa-
rable store sales and a continued expansion in our
operating margin. Gross margin management
continues to be a challenge in today’s managed
care environment. We continue to take a firm
position with third party payors to ensure accept-
able levels of reimbursement, and we are proac-
tively working with our managed care partners to
align incentives to lower costs and improve care.
We are pleased to report that there are signs that
the pressure on our pharmacy margin is begin-
ning to ease.
Cost control has always been a key priority
for CVS and 1998 was no exception. Our invest-
ments in technology, as well as synergy savings
from the acquisitions and the leveraging of our
exceptionally strong sales growth, have enabled
us to decrease our total selling, general and
administrative expense (SG&A) as a percent of
sales by approximately 300 basis points over the
last five years. Currently at 20.9%, our goal is to
reduce our total SG&A as a percent of sales to
less than 20% over the next two years. We cur-
rently have two major initiatives under way,
which we believe will enable us to lower costs
and improve inventory turns as well as in-stock
positions. Our Rx Delivery and Merchandise
Transaction System initiatives will help us con-
tinue to enhance our competitive cost structure.
Earnings from continuing operations,
excluding the effect of non-recurring items,
increased 21.7% in 1998 to $510.1 million, or
$1.26 per diluted share, from $419.2 million, or
$1.05 per diluted share, in 1997. With these
results, CVS generated a five-year compounded
annual earnings growth rate from continuing
operations of nearly 28%.
With a debt to total capital ratio of 25.4% at
year-end, our balance sheet continues to
improve. As such, Standard and Poor’s recently
upgraded our credit ratings, which will result in
real economic savings. Our financial strength in
large part reflects our aggressive capital manage-
ment program. We build our capital investment
plans to take advantage of the opportunities we
believe offer the greatest potential returns. With
the substantial 1998 investments surrounding the
Revco and Arbor acquisitions behind us, we
expect to generate significant free cash flow in
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