CVS Digests Eckerd

Indeed, it was a case of a big fish being eaten by a somewhat larger fish. When the acquisition was finalized last summer, CVS had 4,179 stores, while Eckerd had 1,268. Over the course of 2004, besides the Eckerd acquisition, CVS opened 129 stores and closed 201 (mostly Eckerd locations), so that now the company operates some 5,375 stores. "The acquired stores, particularly in Florida and Texas, gave us market leadership in important high-growth markets," said Ryan, adding that the assimilation of the Eckerd stores has gone faster than expected.

"We completed all store and financial systems conversions by Thanksgiving, less than four months after closing the deal," he continued. "This includes all pharmacy and front-store systems, all inventory management systems, all distribution systems, and all loss-prevention systems. It's important to note that the systems integration process of any transaction is the biggest risk factor, and now that's totally behind us. It was the fasted large-scale system integration in the history of our industry."

Besides system integration, CVS has also completely remerchandised all the former Eckerd stores with its own mix, lowering prices on "over 5,000 items," Ryan said. "We've repositioned the stores to be on the low end of food and drug pricing in these markets. If you remember, Eckerd was clearly at the high end. We believe this investment will pay dividends in the future."

After the acquisition, CVS closed 160 Eckerd locations in 2004. According to Ryan, the company will probably close a few more this year—10 to 15 at most. Also, CVS has remodeled 325 old Eckerd stores thus far, and continues remodeling others at about 40 locations per week, with completion of all of the stores anticipated by July. "Let me be clear on the remodeling," Ryan said. "It is not a paint-and-paper job. Each remodeling is extensive, including reducing shelf heights, widening aisles, installing the CVS trademark carpet, enhancing lighting, adding electronic reader boards, improving signage, even putting our name on the shopping cart handles."

Breaking down CVS's quarterly numbers a little more finely, pharmacy same-store sales rose 5.9% and front-end same store sales increased 1.3% in 4Q 2004, compared with a year earlier. For this quarterly report, the same-store sales number do not include the sales results of former Eckard drug stores, which will be included in same-store sales figures beginning in August. Total pharmacy sales represented 69.5% of total company sales for the quarter, and of that third-party prescription sales were 94.2% of pharmacy sales.

"We've gotten a lot questions about the negative publicity about Vioxx and Celebrex," Ryan said, referring to two popular prescription medicines recently embroiled in controversy regarding their safety. "It's too early to measure the impact, but despite that fact that some scripts are going to fall off, we're also seeing an increase in generics. This will result in a pharmacy sales shortfall, but basically we're holding our margins in this category."