CVS Health Takes More Baby Steps Toward Walking the Walk on Healthy Living

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CVS Health (NYSE: CVS) is becoming that annoying family scold who furrows their brow and wrinkles their nose at anything that smacks of fun. Three years after it stopped selling cigarettes, the drugstore chain is now moving candy toward the back of its stores and adding "healthier" snacks to the front. It's also eliminating from its shelves -- ahead of new FDA restrictions set to take effect next year -- foods that contain partially hydrogenated oils, the predominant type of trans fat in our diets. And it will no longer sell tanning oils and sunscreens with SPFs below 15.

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Yet although candy accounts for 5% or so of drugstore sales, according to the market analysts at Nielsen, CVS won't suffer quite as much as it did when it quit offering tobacco products, a choice that wiped away $2 billion in annual sales. Despite cigarettes amounting to only a tiny fraction of its $139 billion in total sales in 2014, they helped drive sales of other products, and their ban dramatically lowered so-called "front store" comparable sales in the quarters that followed. 

Do as I say, not as I do

There is some logic to CVS' plans. When the store dropped cigarettes, it argued that despite the hit it would take on the top line, it was hard to be an advocate for a healthy lifestyle when it was selling products that were so bad for its customers. But the pharmacy chain wasn't so pious that it was willing to part with the candy, snacks, sodas, and ice cream that are contributing to the nation's obesity crisis.

Earlier this year, researchers from Cleveland Clinic and New York University School of Medicine revealed their findings that obesity was causing the loss of up to 47% more life-years than tobacco, and the Centers for Disease Control said in 2016 that obesity rates are at a record high. Refusing to be complicit in sale of cigarettes was a good first step, and the pharmacy operator's latest policy changes are another in the direction of behaving in a way that's consistent with its philosophy. Investors, however, might wonder whether the cumulative effects of these efforts will diminish CVS' value as an investment.

A healthy investment

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Part of the rationale for the tobacco ban was that it would make CVS' pharmacy benefits management business look better to health insurance companies that contract with it to manage their prescription drug plans and hate having to pay out for tobacco-related illnesses.

Because the PBM business accounted for 60% of revenues and 40% of operating profits, CVS was hoping to make up on that end what it lost to tobacco. 

Pharmacy services revenue has risen 35% since CVS banned tobacco because it's won new business, but rival Walgreens Boots Alliance has been seeking opportunities to build or expand into as many pharmacy networks as possible, and this year it replaced CVS in the pharmacy network for Tricare, the U.S. military's healthcare provider. All told, CVS' path to sticky relationships with health insurers may not be so straight.

Up in smoke

In its first-quarter earnings report in May, CVS said front end sales continued to fall, partially due to the lack of a leap day in the quarter, as well as the calendar shift in the Easter holiday, but also because of declining customer traffic. CVS has failed to register a single quarter of higher front store comparable sales for well over three years.

That category accounted for 10.8% of total revenues last year, down from 13.6% from two years prior. With these fresh restrictions on the sales of products people are actually looking for, we should expect to see general merchandise decline to an even smaller proportion of CVS' total sales going forward.

That's worrisome, as it could mean the chain will lose more customers to the competition, which eventually might hurt the pharmacy business that accounts for three quarters of its revenues.

CVS Health says its anti-smoking efforts have contributed to a decline in smoking rates in states where it does business, but that seems a bit specious since most smokers are likely not just going to quit their habit simply because CVS doesn't sell cigarettes anymore. Smoking rates are overall trending down, and those that remain probably went to buy their cigarettes at Walgreens, Rite Aid, or any of the vast array of convenience stores, grocers, and others that still offer them.

Further, the Affordable Care Act mandated smoking cessation products be covered by health insurers at no cost to consumers. It's hard to say CVS banning cigarettes was the driver.

A prescription for what ails you

In Walgreens' fiscal third-quarter earnings report last month, it said its own comparable-store sales were lower too, but only by 0.4%. It should be noted that while it is not eliminating tobacco sales, Walgreens says it is reducing the visibility of such products while promoting smoking cessation merchandise.

For its part, Rite-Aid has reported its own front-of-store sales were off 1.5% even as pharmacy sales dropped 5%. The fact that CVS Health's rivals are not losing sales nearly as fast as CVS is suggests they may be picking up some defectors who switched due to CVS' lack of tobacco products. It remains to be seen if the trend will continue now that CVS is also turning away from unhealthy food and drinks.

As CVS takes baby steps toward its goal of being the premier pharmacy chain in health and wellness, it might pick up a few customers who are attracted to its more consistent behavior. Yet it's also quite possible it will lose as many if not more customers to competitors who put fewer impediments in the way of customers who want to make riskier choices with their health.

Even so, CVS Health has not eliminated all fatty foods and drinks from its shelves, it's just doing the equivalent of putting those indulgent items in a plain brown wrapper. That still smacks of hypocrisy, which could be worse when it comes from someone who scolds you for your choices.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.