01—Abstract
Summary
Summary of the 10-K filed March 31, 2000. Cited figures are marked; the original filing is the authoritative source.
CVS Corporation's fiscal 1999 10-K (53 weeks ended January 1, 2000) shows a company at a strong point in its growth and integration cycle.
Net sales rose 18.5% to $18.1 billiona, with same-store sales up 12.5% and pharmacy same-store sales up 19.4%. Operating profit reached $1.14 billion, up from $752 million, and net earnings climbed to $635.1 million, or $1.55 per diluted share, compared with $0.95 in 1998. Comparable figures, which strip out 1998 and 1997 merger and restructuring charges, show comparable earnings growth of 24.5%.
The 53rd week contributed to the sales increase; excluding it, net sales grew 16.0%. Cash flow from operations improved to $658.8 millionb from $221.0 million, supported by higher earnings and better working capital management. The balance sheet is solid but has become more leveraged in short-term funding.
Total assets were $7.28 billionc and shareholders' equity was $3.68 billion. Short-term borrowings (commercial paper) were $451 million, and long-term debt was $558.5 million, including $300 million of 5.5% senior notes issued in February 1999. Liquidity is supported by a $670 million five-year credit facility and a $530 million 364-day facility.
Capital expenditures were $493.5 milliond, and the company plans to open roughly 400 to 450 stores in fiscal 2000, with a long-term goal of 80% freestanding locations, up from 33% today. Investors should weigh several risks. Pharmacy sales, now 59% of revenue, carry lower gross margins because of growing third-party (managed care) reimbursement pressure, and comparable gross margin has drifted down from 27.6% in 1997 to 26.9% in 1999.
Management has said it may drop unprofitable third-party programs, which could slow sales growth. The company also guarantees roughly 1,400 former store leases, with an estimated worst-case settlement exposure of about $1.0 billion, although purchasers indemnify CVS. Management reports no material pending litigation and does not use derivatives.
02—Key points
Key Highlights
- Net sales rose 18.5% to $18.1 billion in fiscal 1999; same-store sales grew 12.5%, with pharmacy same-store sales up 19.4%
- Diluted EPS of $1.55 versus $0.95 in 1998; comparable earnings up 24.5% excluding prior-year merger charges
- Operating cash flow more than tripled to $658.8 million, driven by higher earnings and improved working capital management
- Largest U.S. drugstore chain by store count (4,098 stores in 26 states and D.C.) and the top retail prescription filler, with 281 million prescriptions in fiscal 1999
- Comparable gross margin declined to 26.9% from 27.6% in 1997 as lower-margin third-party pharmacy sales grew to 87% of pharmacy sales
- Plans for 400 to 450 new stores in fiscal 2000, with freestanding locations targeted to rise from 33% to about 40% of the store base
- Contingent exposure of roughly $1.0 billion from guarantees on about 1,400 former store leases, indemnified by purchasers
03—Questions
Frequently Asked Questions
How did CVS's earnings and profitability change in fiscal 1999?
Net earnings rose to $635.1 million, or $1.55 per diluted share, up from $384.5 million ($0.95 per share) in 1998. Operating profit increased to $1.14 billion from $752 million, and comparable operating profit rose 20.7% to $1.1 billion. Part of the growth reflects the 53rd week in fiscal 1999, which added to sales and profit. The effective tax rate fell to 41.0% from 44.4%, as 1998 included non-deductible merger costs.
What is driving growth at CVS, and what are the main risks?
Growth is driven by managed care relationships, an aging population, new prescription drugs, and the purchase of prescription files from independent pharmacies. The main risk is margin pressure: pharmacy sales (59% of revenue) earn lower gross margins than front-store sales, and third-party payers keep pushing for lower reimbursement. CVS has dropped or renegotiated unprofitable programs and says it may drop more, which could slow sales growth.
How strong is CVS's balance sheet and liquidity position?
Shareholders' equity rose to $3.68 billion and total assets were $7.28 billion. Short-term borrowings were $451 million at a 6.2% weighted average rate, and long-term debt was $558.5 million, mostly the $300 million 5.5% senior notes due 2004. Liquidity is backed by a $670 million five-year credit facility and a $530 million 364-day facility, and management expects sufficient cash for the next 12 months.
What are CVS's growth plans for fiscal 2000?
CVS plans to open 400 to 450 stores, including about 250 relocations, and to enter Tampa, Florida and Grand Rapids, Michigan. The company expects to enter two to three new markets each year. Relocating shopping-center stores to freestanding sites is a central strategy, with a long-term goal of 80% freestanding stores. Capital expenditures were $493.5 million in 1999.
Are there material legal or contingent liabilities investors should know about?
Management says routine litigation will not have a material adverse effect. The largest contingent item is guarantees on about 1,400 former store leases from business dispositions made between 1991 and 1997. If every purchaser became insolvent, which management considers highly unlikely, CVS estimates settlement at about $1.0 billion. Purchasers indemnify CVS for these obligations. CVS also has $283.8 million in merchandise purchase commitments, and it does not use derivative instruments.
04—Continue