CVS 2006 Annual Report Download - page 5

2 CVS Corporation
Sales trends have moved in line with expectations. We expect
the numbers to climb with the introduction of the CVS brand
to these markets and the disruption of the store conversions
behind us. As noted at the time of purchase, the Sav-on and
Osco stores were operationally in better shape than the Eckerd
stores we acquired from J.C. Penney in 2004. Still, we are
executing against a significant opportunity to produce higher-quality
sales through improvements in merchandise assortment and
category focus. We will also leverage the CVS ExtraCare card to
encourage customer loyalty and increase sales and margins.
Looking at the former Eckerd stores acquired in 2004, same
store sales increased 14 percent in 2006. The front end rose
13 percent, with the pharmacy up 15 percent. This impressive
performance comes on top of the strong gains we posted in
2005. Although same store sales growth for these stores will
moderate going forward, they are still expected to outpace our
overall results for the foreseeable future.
Even as CVS completed two major acquisitions in as many years,
organic square footage increased by 3.2 percent in 2006. We
opened 265 stores, including 147 new locations and 118 relo-
cations. Factoring in closings, we experienced net unit growth of
103 stores. We continued to expand in our newer, high-growth
markets, including those in Florida and Texas as well as Las
Vegas, Los Angeles, Chicago, Minneapolis, and Phoenix. All our
new stores in these markets are running at or above plan, with
both the front end and pharmacy performing well.
Benefiting from new opportunities in the pharmacy
CVS/pharmacy stores now fill 16 percent of all U.S. retail drug
prescriptions. The Medicare Part D prescription drug benefit
and generic drug launches are among the positive industry
factors contributing to our growth. Medicare Part D, rolled out
in January 2006, has led to increased utilization of prescription
drugs. Since enrolled seniors make the same co-payment
regardless of the pharmacy they choose, many are opting for
the convenience of the CVS/pharmacy located right in their
neighborhoods. Despite a competitor’s rollout of a $4 program
for selected generic drugs, we actually experienced a rise
in net prescription transfers in from leading mass merchant
retailers and continued to gain pharmacy share.
Use of generic drugs continues to climb, and they now account
for more than 60 percent of prescriptions filled. Although their
lower prices depress revenue growth, generics are more profit-
able and help fuel our margin gains. They also help reduce
overall healthcare costs for patients and payors.
Our PharmaCare pharmacy benefits management (PBM) and
specialty pharmacy business turned in an excellent performance
in 2006. Revenue rose 24.6 percent to $3.7 billion while
operating profit increased by 43 percent. Prescription Pathways®,
PharmaCare’s Medicare Part D joint venture with Universal
American Financial Corp., now administers prescription drug
benefits for 460,000 seniors and Medicare-eligible individuals.
That number places it among the nation’s top 10 prescription
drug plans for Medicare Part D beneficiaries.