CVS Health retains profitability despite banning sales of tobacco products

CVS Health retains profitability despite banning sales of tobacco products

Retail and drugstore giant CVS Health reported a 9.9% increase in revenues—a favourable figure considering its decision to stop selling cigarettes and other tobacco products last year.

Analysts initially believed banning sales of tobacco products would hurt the company’s profitability. They had reason to say so. Tobacco products accounted for $2 billion in annual sales.

However, results of its 2014 financials are favorable. CVS Health generated total revenue of $139.4 billion in 2014 compared to $136.8 billion in 2013. In its fourth quarter performance, the first full three-month period without tobacco sales, the company’s net revenues increased 12.9 percent to a record $37.1 billion.

CVS Health is currently benefitting from improved sales in its Pharmacy Services and Retail Pharmacy segments. Operating profits for these two businesses during its fourth quarter performance increased by 0.9% and 6.5%, respectively.

“Both segments benefited from the impact of increased generic drugs dispensed and favorable purchasing economics, which improved operating margins,” said CVS Health in a statement. “The Pharmacy Services Segment was also positively impacted by growth in specialty pharmacy, which was mostly offset by client price compression and the incremental investment in the 2015 welcome season as a result of a successful selling season.”

Growth of prescription volumes and an improve pharmacy margin rate positively impacted the Retail Pharmacy segment, thus partially offsetting the negative impacts of banning sales of tobacco products, as well as incremental store operating costs associated with operating more stores.

Note that Obamacare has also encouraged purchase of pharmaceutical products, thus increasing the potential customer base of pharmacy retailers.

Beginning September 2014, the company rebranded itself as CVS Health along with its decision to stop selling tobacco products across its 7,700 stores. This move marked the company’s “broader health commitment” while also pressuring other giant retailers to follow its lead.

“2014 will be remembered as the year in which we rebranded our company as CVS Health and made the right decision to exit the tobacco category, better aligning our company with patients, payors, and providers,” said president and chief executive Larry Merlo in a statement. “Only CVS Health has an integrated enterprise model bringing differentiated, channel-agnostic solutions to the marketplace.”