CVS STUMBLES, BUT DRUG STORE OUTLOOK REMAINS POSITIVE

MARK HAMSTRA

WOONSOCKET, R.I. -- CVS Corp. here last week unveiled a restructuring plan that will entail closing about 200 stores and other measures designed to improve profitability.

Analysts said that the moves do not indicate any fundamental problems in the drug store industry, however.

"I think it is a CVS problem and not an industry problem," said Derek Lechow, investment analyst, Barrington Research, Chicago. "Overall industry fundamentals seem very strong at this point."

CVS, he said, has been reaping less profit on much of its front-end merchandise because of aggressive price competition in certain markets from drug store rivals Rite Aid, Camp Hill, Pa., and Eckerd, Largo, Fla.

"In order to gain customers in a weakening economy, they've been really promoting low prices, and it's had a devastating effect on margins," he said.

He said the prospects for the pharmacy side of CVS' business, which represents about 66% of revenues, appear to be positive based on the aging population and the expected approval of several new drugs next year.

In a research report, Standard & Poor's, New York, also pointed out that CVS has had trouble staffing pharmacists in four major markets and also has had difficulty implementing a pharmacy workflow system in its stores.

In addition to the 200 store closings, which will take place in January in various markets around the country, CVS also will shutter one of its 10 distribution facilities and one of its two ProCare specialty-pharmacy, mail-order centers serving the needs of patients with chronic diseases. It will also lay off about 100 people from its headquarters here. The company will record a fourth-quarter restructuring charge of $350 million related to the moves.

CVS detailed the plan in its third-quarter earnings report, in which it said profits for the period ended Sept. 29 fell 16%, to $123.7 million, vs. $147.2 million in the year-ago period, excluding one-time gains.

In a conference call with analysts, Tom Ryan, chairman and chief executive, blamed the earnings decline on the weak economy, a lack of new drug introductions and the growth of the mail-order drug industry. In addition, he cited the pharmacy shortage, which CVS said earlier this year had forced it to reduce its pharmacy hours at some stores.

"We understand the problems," he said. "They are isolated, and we have plans to fix them."

He remained bullish on the company's growth potential and cited plans to expand the chain's presence in several new markets.