CVS: Lower Earnings, to Close 200 Stores By Ellis Mnyandu

NEW YORK (Reuters) - CVS Corp. (NYSE:CVS - news) on Tuesday reported a 16 percent drop in third-quarter earnings due to lower than expected sales growth and said it plans to cut staff and close about 200 of its drugstores in the first quarter.

The company, which has about 4,100 stores, said it will take a fourth-quarter charge of $350 million for the restructuring, which also includes the closing of one of its 10 distribution facilities.

Even before the charge, fourth-quarter results will be significantly lower than Wall Street's expectations, according to CVS, the second-largest U.S. drugstore chain behind Walgreen Co. (NYSE:WAG - news).

``We are disappointed with our results for the third-quarter and committed to taking the necessary actions to improve performance and restore healthy long-term growth,'' CVS Chairman, President and Chief Executive Tom Ryan said in a statement.

The company reported third-quarter net income of $123.7 million, or 30 cents a diluted share, down from year-earlier earnings of $147.2 million, or 36 cents per diluted share, excluding a $19.2 million gain from the settlement of a class-action lawsuit.

CVS last month had lowered its earnings forecast to between 30 cents and 32 cents a share from a range of 35 cents to 37 cents, citing a slowdown in customer traffic after the Sept. 11 attacks on New York and Washington.

But the company has also been facing operational problems, including a shortage of pharmacists. It has blamed staff shortages for poor service and driving customers away at some of its key markets.

FOURTH-QUARTER OUTLOOK

``I get the sense that expansion was the most important thing to them, not core operations,'' CyberBusinessCredit LLC analyst Richard Hastings said. ``They have not given full attention to total enterprise integration.''

A weakening economy worsened CVS's operational problems, he added.

Before the restructuring charge of 56 cents a share, CVS said it expects fourth-quarter earnings of 23 cents to 28 cents. Analysts on average were expecting a profit of 49 cents a share, from a range of 43 cents to 51 cents, according to First Call.

CVS said it sees sales rising 8 percent to 9 percent in the fourth quarter.

Third-quarter sales rose 10.1 percent to $5.4 billion from $4.9 billion, while sales at stores open at least a year -- a key measure of retailers' performance -- increased 7.6 percent.

Hastings said CVS had also not done a good job in marketing its high-margin front-end business. Same-store sales in this category, which includes nonpharmacy items such as toothpaste, cosmetics and snacks, rose 0.3 percent for the third quarter.

At the pharmacy section, which accounted for 66.6 percent of total sales, same-store sales increased 11.8 percent. Hastings said such growth does not benefit CVS, however, because of the higher costs that go with that business.

The company said third-party prescriptions accounted for 90.6 percent of pharmacy sales.

Shares of CVS closed at $31.62 in New York Stock Exchange trade on Monday. Since Sept. 11, the stock has fallen about 13 percent, compared with a decline of almost 6 percent for the Standard & Poor's Index (.SPETR) of drugstores.

-- Guy Daley (guydaley1@netzero.net), October 30, 2001