Drugstore chain CVS Health Inc. (CVS, Financial) reported better-than-expected fourth-quarter and full-year earnings before the opening bell on Thursday and announced wage hikes and improved benefits for employees.
The Woonsocket, Rhode Island-based company posted adjusted earnings per share of $1.92, topping Thomas Reuters’ estimates of $1.89. CVS said its earnings were positively impacted by a $1.5 billion benefit related to the Tax Cuts and Jobs Act.
Quarterly revenue grew 5% year over year to $48.4 billion, exceeding Thomas Reuters’ expectations of $47.5 billion.
For the year, CVS recorded adjusted earnings of $5.90 per share on $184.8 billion in revenue.
Following the announcement, shares, which closed at $74.36 on Wednesday, initially rose 2% in premarket trading before reversing lower.
Performance and Aetna acquisition
Revenue in the company’s pharmacy services segment rose 9.2% to $34.2 billion during the quarter due to growth in its pharmacy network and specialty pharmacy volume.
Despite a particularly bad cold and flu season, revenue in its retail pharmacy division grew a mere 0.3% as a result of increased generic dispensing rates and reimbursement pressure. In addition, front store same-store sales, which exclude the pharmacy, slipped 0.7% during the quarter due to lower traffic.
Overall same-store sales, a closely watched metric for retailers, increased 0.1% for the quarter and declined 2.6% for the year.
In a statement, President and CEO Larry Merlo commented on the company’s performance and alluded to its proposed acquisition of health insurance company Aetna Inc. (AET, Financial).
“In 2017, we delivered on the four-point plan we set in place to return to more robust levels of growth,” he said. “Our position in the evolving health care landscape is stronger than ever before, and we remain confident in our model and in our ability to make health care more affordable, more accessible and more effective.”
According to CNBC, the two companies want to construct an integrated health system that brings pharmacy and health benefits together. It will also provide preventative care services through CVS’s retail clinics.
Shareholders will vote on the $69 billion deal in March.
Impact of tax reform
As a result of the tax reform legislation signed by President Trump in December, CVS also announced on Thursday it is increasing wages and sweetening employee benefits.
"Today, we're building on the investments we've been making in our employees, in their wages, benefits and career development,” Merlo said. “It's our employees who drive our performance and we appreciate how hard they work every day to deliver on our purpose of helping people on their path to better health."
The company is increasing the starting pay for hourly employees to $11 an hour, beginning in April. CVS also plans to adjust pay rates for many of its retail pharmacy technicians, front store associates and other hourly retail employees later on in the year.
In regard to benefits, the retailer said full-time employees will quality for up to four weeks of paid parental leave. In addition, premiums for employees enrolled in the company’s health care plan will remain at current rates for 2018-19.
CVS said these investments will total approximately $425 million annually.
Outlook
In addition to boosting pay and benefits for employees, CVS said it anticipates investing at least $275 million in improving data analytics, care management solutions and pilot programs. It will also pay down debt related to its acquisition of Aetna.
As a result of these investments, the company revised its operating profit growth projections for full-year 2018 to range between down 1.5% and up 1.5%. Previous guidance called for 1% to 4% growth.
For the first quarter, operating profit is expected to grow between 0.5% and 4.5%.
CVS also said it anticipates an additional $1.2 billion in cash flow due to the changes in the tax rate.
Stock price
CVS shares fell more than 3% on Thursday morning to around $72.01.
According to GuruFocus, the stock lost 7% in 2017. Year to date, it is down 1%.
Disclosure: No positions.
