CVS Corporation

FOUNDED: 1892

Contact Information:

HEADQUARTERS: One CVS Drive
Woonsocket, RI 02895
PHONE: (401)765-1500
FAX: (401)766-2917
URL: http://www.cvs.com

OVERVIEW

CVS is the leading U.S. retail drugstore chain based on sales. The company operates nearly 4,200 retail and specialty pharmacy stores in 33 states and the District of Columbia. CVS filled more than 309 million prescriptions in 2001 and had a leading market share in 35 of the top 100 U.S. drugstore markets, a feat unrivaled by its competitors.

CVS has two main business segments: retail pharmacy and pharmacy benefit management. The retail pharmacy unit includes the operations of CVS retail outlets, as well as the online business of CVS.com. The company's PBM division is among the top ten full service PBMs in the United States and offers managed care drug programs that serve 12 million customers.

COMPANY FINANCES

CVS secures most of its sales from its pharmacy operations, which accounted for 66 percent, or $14.8 billion, of total net sales in 2001. This figure has grown steadily over the past several years, up from 59 percent in 1999, and 63 percent in 2000. The remainder of the firm's sales stem from front store operations, which include things like film processing. Sales from this segment reached $7.4 billion in 2001, an increase of 3.9 percent over the previous year. Total revenues for CVS reached $22.2 billion in 2001, compared to $20 billion in 2000.

While net income grew dramatically from $396 million in 1998 to $746 million in 2000, it fell during 2001 to $413 million. Stock prices ranged from a high of $63.75 per share in 2001 to a low of $22.89 per share. Earnings per share fell from __BODY__.83 in 2000 to __BODY__.00 in 2001.

ANALYSTS' OPINION

The aging American population, the increasing popularity of managed care, and the continual development of new drugs all point toward future growth in the U.S. pharmacy industry. In fact, pharmaceutical consulting firm IMS Health Inc. predicts that pharmacy industry sales will grow from $140 billion to almost $280 billion by 2005. As the leading pharmacy prescription dispenser, CVS believes it is well positioned to capture significant market share as demand for its pharmacy services increases.

However, CVS battled a slowing economy during 2001 that caused sluggish sales in its front store operations. The company also suffered from a pharmacist shortage, which forced some stores to shorten pharmacy hours. Increased competition, higher payroll costs related to attracting new pharmacists, and extended advertising budgets weakened company earnings. As a result, CVS began to restructure certain operations in 2002, and it set an aggressive expansion program in motion to capture new market share. While analysts at Standard & Poor's applauded the firm's strategy, they rated CVS stock a hold and did not expect to see growth until the company reported improvement in both its pharmacy and front store sales.

HISTORY

CVS dates back to 1892, when Frank Melville formed Melville Corp. and acquired three shoe stores with the hopes of developing a chain. His dream became a reality in 1922, when he and his son teamed up with J. Franklin McElwain to establish the Thom McAn Shoe Corp. Within ten years, sales had reached $26 million and the company was operating nearly 480 shoe stores under a variety of brand names.

During the next several decades, the company achieved several milestones including going public, producing its 100 millionth pair of shoes, and acquiring the Miles Shoes chain. In 1968 the company branched out into the apparel industry by opening a Chess King clothing store and purchasing the Foxwood chain, which was later renamed Foxmoor. One year later, Melville purchased the CVS chain.

CVS was created in 1963, when Stanley and Sid Goldstein, along with partner Ralph Hoagland, opened the first Consumer Value Store (CVS) in Lowell, Massachusetts. By 1969 the trio had 40 stores in operation and wished to expand further. Melville expanded CVS's operations throughout the 1970s via several purchases. In 1972 the Clinton Drug and Discount was acquired and, in 1977, Mack Drug was also purchased. By the early 1980s, CVS operated more than 400 stores. Sales reached __BODY__ billion for the first time in 1985. The chain also continued to add pharmacies to its stores, a strategy that had started in the 1970s.

In the mid-1990s, Melville decided to focus on its successful drugstore chain; as a result, the firm began selling off other holdings, including Marshall's Inc., KayBee Toys and Hobby Shops Inc., Linens 'n Things, and the footwear businesses. During this time, the company officially changed its name from Melville Corp. to CVS Corp. to reflect its new focus.

Along with the 1990 purchase of the Peoples Drugstore chain, CVS made several other acquisitions during the 1990s to secure its leading position in the industry. The 1997 purchase of Revco D.S. Inc. added 2,600 stores in 17 states. CVS then bought the Michigan-based Arbor Drugs Inc. chain, increasing its store count to 4,100. In the late 1990s, CVS gained an online presence when it acquired pharmacy Web site Soma.com, which was eventually renamed CVS.com.

STRATEGY

Melville Corp.'s strategy throughout most of the 1900s included expanding into various retail operations through acquisition. The strategy shifted, however, when the company made a commitment to focus solely on its drugstore operations in the 1990s. To realize its mission of becoming a leader in the pharmacy and drugstore industry, CVS began acquiring large chains that had a strong presence in markets that CVS had yet to infiltrate. For example, the Revco purchase catapulted CVS into a leading position in the Northeast, Mid-Atlantic, Midwest, and Southeast markets. In addition, the Arbor Drugs purchase gave CVS a foothold in Michigan for the first time.

In order to maintain its industry dominance, CVS developed several strategies during the early years of the new millennium. Attracting pharmacists became a priority as the company struggled to keep its growing number of pharmacies staffed. By offering attractive benefits and state-of-the-art technology, the company was able to hire 2,000 pharmacists during 2001. Nearly 60 percent came from competition. Another strategy included penetrating the fastest growing drugstore markets in the United States: Chicago, Illinois; Florida; Las Vegas, Nevada; and Houston and Fort Worth, Texas. During 2001, CVS opened 43 stores in these markets. The company also planned to open new stores in existing markets and relocate poorly performing stores to new locations.

As part of its customer relations strategy, CVS launched the ExtraCare card program in early 2001. Customers who signed up for the program received special coupons, healthcare information, and a __BODY__ rebate for every $25 spent with the card. By mid-2002 ExtraCare cards were used by 25 million customers in 50 percent of store transactions.

FAST FACTS: About CVS Corp.

Ownership: CVS Corp. is a publicly owned company traded on the New York Stock Exchange.

Ticker Symbol: CVS

Officers: Thomas M. Ryan, Chmn., Pres., and CEO, 49, 2001 base salary $993,750; David B. Rickard, EVP, CFO, and CAO, 54, 2001 base salary $595,000; Larry J. Merlo, EVP Stores, 45, 2001 base salary $495,000

Employees: 107,000

Principal Subsidiary Companies: CVS Corp. has subsidiary companies and retail locations in 33 states and the District of Columbia. Along with its drugstores, the company operates PharmaCare Management Services Inc., a pharmacy benefits manager (PBM).

Chief Competitors: CVS competes with retail drugstore chains, supermarkets, discount merchandisers, convenience stores, mail order prescription providers, and Internet pharmacies. Its primary rivals include Rite Aid, Wal-Mart, and Walgreen.

CHRONOLOGY: Key Dates for CVS Corp.

1892:

Frank Melville purchases three shoe stores

1922:

Thom McAn Shoe Corp. is established

1963:

The first CVS store opens

1969:

Melville acquires the CVS chain

1990:

The Peoples Drug Stores chain is purchased

1996:

Melville changes the company's name to CVS Corp. to reflect the firm's new focus on its drug store operations

1997:

Revco D.S. Inc. is acquired

1998:

CVS purchases Arbor Drugs Inc.

1999:

Soma.com is acquired and renamed CVS.com

INFLUENCES

CVS Corp.'s operations have been influenced by past success with acquisitions and entering new markets. During the mid-1990s, growth in the pharmacy industry prompted Melville to sell off its various retail operations in order to focus on the CVS drugstore and in-store pharmacies business. The company's growth had historically been via acquisition, a strategy that continued after the company adopted the CVS name. During the mid-to-late 1990s, the drugstore industry went through a period of consolidation. Putting its past experience with expansion to good use, CVS grew in size by purchasing smaller chains, which gave it access to many new markets and the necessary market share to become a leader in the industry. Its success with entering new markets has also influenced the company's long-term strategy. While large acquisitions have tapered off, the firm's goals include establishing new stores in emerging markets.

CURRENT TRENDS

CVS was forced to deal with several negative trends—including a slowing North American economy during 2000 and 2001, fierce competition, and a pharmacist shortage—in the early 2000s. To combat weakening sales, the company implemented a plan in 2001 to shut more than 200 poorly performing stores, a distribution center, and a mail order facility. To ward off competition, the company also began to spend heavily on advertising and developed new customer incentive programs. CVS also implemented an aggressive pharmacist recruitment program to staff its in-store pharmacies.

Another trend affecting CVS is the growing popularity of pharmacy benefit management that can offer specialty pharmacy services. During 2001 the company announced that it was integrating ProCare, its specialty pharmacy business that provides drug therapies for serious conditions (including organ transplants, HIV, or cancer) with PharmaCare Management Services Inc. By combining the businesses, CVS believes it will better serve its clients—managed care organizations, self-insured employers, and third party administrators—by enabling them to offer more comprehensive pharmaceutical care.

PRODUCTS

Along with prescription drugs, CVS stores offer a wide variety of merchandise. The firm's main product categories include health, cosmetics, skin care, hair care, photo, and seasonal merchandise. The company also sells bath and body products, along with shampoo and hair care products under the private label Essence of Beauty. Overall, the company's private label products accounted for 12 percent of front store business during 2001.

To bolster the sale of its beauty products, as well as cater to female shoppers, the company developed a new beauty care concept entitled Beauty at the Door. As part of the program, CVS stores revamped their floor plans to position beauty departments at the very front of the store, a high traffic area. The company also placed Healthy Women store kiosks, which provided information on female health and wellness issues, in the beauty department.

CORPORATE CITIZENSHIP

CVS Corp.'s corporate mission is to help people live longer, healthier, happier lives. As part of this mission, the company has partnerships with the American Diabetes Association, the American Heart Association, Easter Seals, and the United Way to educate people on the prevention of and cures for diseases. CVS also promotes the Reach Out and Read program, a pediatric literacy program. The company supports public schools in local communities and also raises money for charities by hosting the CVS Charity Golf Classic.

HELPING HANDS

The CVS corporate mission is to help people live longer, healthier, happier lives. The company put this statement into action after the terrorist attacks that occurred on September 11, 2001. The company converted its store on Fulton Street in lower Manhattan into an emergency medical staging area in order to help victims. At its store inside of the Pentagon, CVS provided food, water, and medicine to emergency personnel. In Somerset, Pennsylvania, where United Airlines Flight 93 crashed, CVS workers gave food and water to emergency crews at the site. Through CVS-sponsored events and an employee and customer fundraising effort, CVS was also able to make a substantial donation to the American Red Cross Disaster Relief Fund.

EMPLOYMENT

Because of the strong emphasis on its pharmacy operations, CVS has an aggressive recruitment program in place to attract pharmacists to the company. New hires are attracted to CVS for the following reasons: the firm's pharmacy operations are at its core, unlike most of its competitors; it invests heavily in pharmacy technology to create a user-friendly work environment; and it created the Excellence in Pharmacy Innovation and Care (EPIC) project that develops new technology and sets workplace standards.

SOURCES OF INFORMATION

Bibliography

"CVS Bigger and Better After Meteoric Rise." Chain Drug Review, 10 December 2001.

"CVS Corp." DSN Retailing Today, 7 January 2002.

CVS Corp. Home Page, 2002. Available at http://www.cvs.com.

"CVS Hones Women's Health Effort." Chain Drug Review, 4 March 2002.

Eder, Rob. "CVS Has New Look With Beauty at the Door."Drug Store News, 22 October 2001.

"Premium PL Line a Success at CVS." Chain Drug Review, 18 March 2002.

For an annual report:

write: Nancy R. Christal, Vice President of Investor Relations, CVS Corp., 670 White Plains Rd., Suite 210, Scarsdale, NY 10583

For additional industry research:

Investigate companies by their Standard Classification Codes, also known as SICs. CVS Corp.'s primary SICs are:

5912 Drug Stores and Proprietary Stores

5961 Mail Order Houses

6719 Holding Companies, Not Elsewhere Classified

Also investigate companies by their North American Industrial Classification System Codes, also known as NAICS codes. CVS Corp.'s primary NAICS codes are:

446110 Pharmacies and Drug Stores

454110 Electronic Shopping and Mail Order Houses

551112 Offices of Other Holding Companies