01—Abstract
Summary
Summary of the 10-K filed March 29, 1995. Cited figures are marked; the original filing is the authoritative source.
Important note: this filing is the 10-K of Melville Corporation (NYSE: MES) for fiscal 1994, not CVS Health.
CVS was a Melville division (1,328 drugstores, about 38% of 1994 sales), and the company now known as CVS Health traces its roots to this business. The analysis below covers Melville as a whole. Melville reported 1994 net sales of $11.29 billiona, up 8.1% from $10.44 billion, with same-store sales up 3.3%.
Profitability weakened. Operating profit fell 2.0% to $610.7 millionb, net earnings dropped 7.3% to $307.5 million, and EPS declined 8.3% to $2.75 from $3.00. Results were hurt by weak apparel and footwear performance at Marshalls, Wilsons and Thom McAn, higher costs tied to lease guarantees on divested businesses (Chess King and Freddy's), and gross margin pressure as the mix shifted toward lower-margin prescription drugs.
Management said EPS excluding the real estate costs would have been $2.86c. CVS, Kay-Bee and Linens 'n Things were the growth drivers. The balance sheet remained solid but borrowing rose.
Shareholders' equity was $2.38 billiond (book value $22.54 per share), and long-term obligations were 12.8% of total capitalization. Short-term borrowings (commercial paper) rose to $200 million from $90 million to fund a $279.5 million inventory increase and $421.4 million of capital spending, which management estimates at $325 million for 1995.
Operating cash flow of $498.4 million covered the $225.5 million in dividends. The company also disclosed a comprehensive strategic review of its business mix, which signals possible portfolio changes ahead.
02—Key points
Key Highlights
- Net sales rose 8.1% to $11.29 billion, with same-store sales up 3.3%, led by CVS (+6.0% same-store) and Kay-Bee; Marshalls and Wilsons declined.
- Net earnings fell 7.3% to $307.5 million and EPS fell 8.3% to $2.75, as operating profit slipped 2.0% to $610.7 million.
- Operating margin declined to 5.4% from 6.0%, and cost of goods sold rose to 64.3% of sales from 63.9%, reflecting the shift toward lower-margin pharmacy sales.
- Lease guarantee exposure from divested businesses (Chess King, Freddy's) added one-time charges; reserves total $15.0 million for Chess King and related leases, and 501 guaranteed leases carry a present value of about $117.7 million.
- Dividend held at $1.52 per share (about 56% payout of 1994 EPS), with a 0.5% increase in total common dividends paid.
- Liquidity relied on short-term borrowing: notes payable rose to $200 million, and roughly 70% of annual earnings come in the fourth quarter, requiring seasonal financing.
- A comprehensive strategic review of the business mix was launched at year-end, and the 1992 realignment program is largely complete, with $301.6 million of the $347.0 million charge utilized.
03—Questions
Frequently Asked Questions
Is this 10-K filed by CVS Health?
No. The filing is from Melville Corporation (fiscal year ended December 31, 1994). CVS was one of Melville's four segments and operated 1,328 drugstores in 1994. The document does not describe a standalone CVS Health company.
Why did earnings decline despite higher sales?
Sales grew 8.1%, but operating profit fell 2.0%. Apparel and footwear underperformed (apparel operating profit fell 11.5%), gross margins eroded as prescription drugs grew as a share of sales, SG&A deleveraged on sales shortfalls, and the company took about $17.5 million in pre-tax lease guarantee reserves.
How strong is the balance sheet and can the company fund its growth?
Shareholders' equity was $2.38 billion and long-term debt was $331 million, against total assets of $4.74 billion. Operating cash flow of $498 million covered capital spending of $421 million and dividends of $226 million. Short-term borrowing rose to $200 million to finance seasonal inventory. The company has $693.5 million of bank credit lines available, and the 1995 capital budget was cut to an estimated $325 million.
What are the main risks investors should watch?
Key risks include continued weakness in apparel and footwear, pressure on pharmacy margins from third-party payers, further lease guarantee charges if bankrupt purchasers reject more leases, the Kmart footwear license expiring in May 1995 with a new agreement expected, and the outcome of the strategic review, which could involve divestitures or restructuring.
04—Continue