Cornell says CVS deal would grow traffic, sales

Target’s sale of its pharmacy business to CVS Health, which would operate Target’s 1,660 in-store pharmacies under the CVS/pharmacy banner, would allow Target to sharpen its focus on “reinventing food” while benefiting from increased traffic and sales, said Target chairman and CEO Brian Cornell during a call with investors Monday.

“One of the great things we offer in the marketplace just broadly is one-stop shopping,” Cornell said. “You come to Target and you take care of many of your needs all at once. I think now when you bring CVS’ scale and their clinical resources, that provides an even larger opportunity to provide that one-stop shop to many, many more guests than are currently utilizing our pharmacy today.”

Cornell and Target EVP and CFO John Mulligan acknowledged that although Target Pharmacy is valuable to its guests, with 5% of 7% of shoppers utilizing its services, it lacks the scale and expertise necessary to succeed at a time of continual change in healthcare.

“[CVS Health] bring scale, they bring cost efficiency, they bring expertise that we just could not bring to a space where we are operating as a subscale player,” said Mulligan, adding that Target will benefit from positive health perceptions associated with the CVS brand.

“Our guest research clearly indicates that their view of our wellness credibility goes up significantly with a partner like CVS Health in our stores providing those healthcare services. So we view this as a terrific win for our guests,” he said.

Cornell said that the deal will allow Target, based in Minneapolis, to operate with greater efficiency, noting that the “transaction will free up our resources. We can deploy in support of our key growth priorities, including on-demand shopping, category roles, localization and personalization and the development of new urban formats. Another key priority for Target is to become a faster-moving, more agile organization, focused on acting decisively and removing roadblocks which slow down innovation.”

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On the health and wellness front in particular, Target will improve products and experiences, including “options to help our guests eat well and stay active through an enhanced assortment of non-toxic and clean label options,” Cornell said.

CVS, headquartered in Woonsocket, R.I., would pay Target approximately $1.9 billion for the pharmacies and 80 in-store clinics to be rebranded under CVS’s MinuteClinic banner.

In addition to operating existing Target pharmacies under its brand, CVS would open and operate pharmacies at new Target stores moving forward, including small-format stores and new locations resulting from a planned co-development agreement.

“Under this plan, we expect to open five to 10 co-developed Target Express stores in the two years following the close of the transaction, with an option to open up additional small format stores over time,” said Cornell of the deal. “Finally, as part of this transaction, CVS plans to expand their MinuteClinic business in existing Target stores over the next three years.”

Under the terms of the deal, CVS would pay ongoing rent to Target. These costs are expected to be in the $20 million to $25 million range in the year following the closing, Mulligan said.

While CVS would operate the pharmacies and in-store clinics, products and services operated outside of those spaces, such as over-the-counter products, would remain under Target’s purview.

“We’ll just continue to enhance our focus on those key signature categories, including wellness, which means a lot of the OTC items,” said Mulligan. “We’ll be focusing on our core strength, making great choices from an assortment standpoint for our guests, making sure that we’ve got an outstanding in-store presentation and continuing to make sure that we localize and personalize how we interact with our guests.”

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