CVS 2001 Annual Report Download - page 14

CVS Corporation
12
I ntroduction
Fo r an understanding o f the significant facto rs that influenced
o ur perfo rmance during the past three fiscal years, the fo llo wing
discussio n sho uld be read in co njunctio n with the audited
co nsolidated financ ial statements and no tes to the co nso lidated
financial statements presented in this Annual Repo rt.
Comprehensive Business Review
During the fo urth quarter of 2001, management appro ved an
Actio n Plan, which resulted fro m a co mprehensive business review
designed to streamline o peratio ns and enhance operating
efficiencies. The Actio n Plan included the fo llo wing initiatives:
•Clo sing 229 CVS/ pharmacy and CVS Pro Care sto res;
•Clo sing o ur Henderso n, No rth Caro lina distributio n c enter;
•Clo sing o ur Co lumbus, Ohio mail o rder facility;
•Clo sing two of o ur satellite office facilities;
•Co nso lidating o ur specialty pharmacy business, CVS Pro Care,
into o ur pharmacy benefit management business,
PharmaCare; and co nso lidating o ur Internet business into
o ur Retail Pharmacy business; and
•Staff reduc tio ns related to the above closings and o ther
streamlining initiatives.
In acc o rdance with Emerging Issues Task Fo rce Issue 94-3,
“ Liability Reco gnitio n fo r Certain Emplo yee Terminatio n Benefits
and Other Co sts to Exit an Activity (Including Certain Co sts
Incurred in a Restructuring) ,” Statement o f Financial Acco unting
Standards ( “ SFAS”) No . 121, “Acco unting fo r the Impairment of
Lo ng-Lived Assets and fo r Lo ng- Lived Assets to be Dispo sed Of”
and Staff Acco unting Bulletin No . 100, “Restructuring and
Impairment Charges,” we recorded a $346.8 millio n pre-tax
( $226.9 millio n after-tax) charge to o perating expenses during
the fo urth quarter of 2001 fo r restructuring and asset impairment
co sts asso ciated with the Actio n Plan. In acco rdance with
Acc o unting Research Bulletin No . 43, “Restatements and Revision
of Acco unting Research Bulletins,” we also reco rded a $5.7
millio n pre- tax charge ( $3.6 millio n after-tax) to co st o f goo ds
so ld during the fo urth quarter o f 2001 to reflect the markdo wn o f
certain invento ry co ntained in the clo sing sto res to its net
realizable value. In to tal, the restructuring and asset impairment
charge was $352.5 millio n pre- tax ( $230.5 millio n after-tax) , o r
$0.56 per diluted share in 2001 ( the “ Restructuring Charge” ) .
Please read No te 2 to the co nso lidated financial statements fo r
o ther important info rmatio n abo ut the Restructuring Charge.
Results of Operations
Fiscal 2001, which ended o n December 29, 2001 and fiscal 2000,
which ended on December 30, 2000, eac h included 52 weeks.
Fiscal 1999, which ended o n January 1, 2000, included 53 weeks.
Net sales ~ The fo llo wing table summarizes o ur sales
performance fo r the respective years:
As yo u review o ur sales perfo rmanc e, we believe yo u sho uld
co nsider the fo llo wing impo rtant info rmatio n:
•Our pharmacy sales gro wth has benefited fro m o ur ability to
attract and retain managed c are custo mers and favo rable
industry trends. These trends include an aging American
po pulation consuming a greater number of prescriptio n
drugs, the increased use o f pharmac euticals as the first line
of defense for healthcare and the introduction of a number
of successful new prescriptio n drugs in 1999 and 2000.
However, the introductio n o f new prescriptio n drugs had less
of an impact o n sales in 2001, co mpared to recent years,
due to the lack of significant “blo c kbuster” drug
introductions during 2001. It is po ssible that this trend will
co ntinue in 2002 as there is no way to predict with
certainty the pace o f new drug intro ductio ns. Further, sales
in 2002 are expected to be negatively impacted by the
expiratio n o f patent protectio n o n a number of po pular
branded pharmaceutical pro ducts, which will likely result in
the introduction of lo wer priced generic equivalents.
However, gro ss margins o n generic drug sales are generally
hig her than o n sales of equivalent higher pric ed
branded drug s.
•Sales were neg atively impacted during 2001 by a pharmacist
sho rtage in certain markets co mbined with the weakening
eco no my and an increasingly co mpetitive environment that
ultimately resulted in lo wer custo mer co unts and lo st sales
during 2001. To address these issues, we intensified o ur
pharmacist recruiting and retentio n effo rts. These effo rts
significantly impro ved staffing levels and reduced turno ver
in o ur sto res. As of the end of August 2001, we had
returned to full staffing levels. We also initiated a custo mer
reac tivatio n pro gram, which invo lved direct mailings and
targeted incentives to fo rmer CVS custo mers. Further, we
inc reased our pro mo tio nal activity in respo nse to the
inc reasingly co mpetitive environment. To the extent
necessary, we expec t to co ntinue these programs in
selected markets during 2002.
Management’s Discussion and Analysis of
200 1 2000 1999
Net sales ( in billio ns) $ 22.2 $ 20.1 $ 18.1
Net sales increase ( 1 ) 10.7% 11.0% 18.5%
Same store sales increase:
To tal 8.6% 10.9% 12.5%
Pharmacy 13.0% 17.7% 19.4%
Fro nt sto re 1.2% 1.1% 3.6%
Pharmacy % o f total sales 66.1% 62.7% 58.7%
Third party % o f pharmac y sales 90.9% 89.2% 86.5%
( 1) The increase in net sales during 2000 was negatively impacted by the 53rd wee k in
199 9, while the increase in 1999 was po sitively impacte d. Excluding the 53rd we ek in
199 9, comparable net sales increased 13.4% in 2000 and 16.0% in 1999.