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CVS to Close About 900 Stores Over Three Years. Here Is Why.

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CVS Health

is planning to close approximately 300 stores a year for the next three years, prompting the store to lower its end-of-year guidance.


CVS

(ticker: CVS) will start closing stores and reducing store density in the spring of 2022. The company plans to offer impacted employees roles in other locations or different opportunities within its workforce.

The store closures are a bid by CVS to restructure the company’s brick-and-mortar retail operations to adapt to changing consumer behavior, which favors retailers with effective digital channels as well as physical presence.

“Investors are reacting positively to the entire new approach that CVS is taking which is, at its core, about making health services convenient and accessible in a consumer-friendly way,” said Jennifer Foster, Chilton Trust co-chief investment officer.

The stock was rising 2.2% to $94.73 on Thursday.

Because of the store closures, the company expects to record an impairment charge in the fourth quarter of 2021 of between $1 billion and $1.2 billion, or between 56 cents and 67 cents a share. This brings the 2021 full-year earnings per-share guidance range to $5.46 to $5.67, down from $6.13 to $6.23.

“Our retail stores are fundamental to our strategy and who we are as a company,” said Karen S. Lynch, president and CEO of CVS Health, in a statement. “We remain focused on the competitive advantage provided by our presence in thousands of communities across the country, which complements our rapidly expanding digital presence.”

As part of the company’s ongoing transformation efforts, CVS announced it would bring in Prem Shah to be the company’s first chief pharmacy officer. Shah will oversee its multichannel approach to online and physical sales. He will also be co-president of retail business alongside Michelle Peluso, who has been instrumental in reshaping CVS’ consumer-first approach, Guertin said.

The announcement on store closings came as no surprise to Ryan Swehla, principal of commercial real estate investment manager Graceada partners.

“If you look at CVS’s product mix, pretty much everything there can be outsourced to the internet,” Swehla said.

To remain competitive in a digital era, retailers need to provide services, products, or experiences that are not readily available online, he said.

In an effort to optimize its in-person experiences, CVS also will create three new store formats: sites dedicated to offering primary care services, enhanced versions of HealthHUB locations that offer services for everyday health needs, and traditional CVS pharmacy stores.

“Having looked at the transformation of the United States healthcare system, I think this move by CVS is both strategically sound and fiscally responsible,” said Syed Husain, head of pharmacy investing at Solomon Partners. Husain previously worked at CVS for 26 years, most recently as vice president of corporate mergers and acquisitions.

CVS’s strategic transformation will allow the company to make more targeted, hyper-localized investments, Husain said. For example, rural markets may have bigger need for a holistic care center with access to a wide variety of medical services, whereas some urban environments may only need a prescription pick-up point or a kiosk, he added.

“Healthcare is hyper-localized and it really needs to be adjusted to that,” Husain said.

The company’s retail metamorphosis has been afoot for several months as CVS transitions to a broader health services company from a pharmacy-specific company. Much of the transformation has focused around expanding CVS’ virtual capacities, said Chief Financial Officer Shawn Guertin on a call with analysts last week.

“More customers are seeking complementary health services that work together, such as virtual care,” Lynch said in a call following the company’s release of third-quarter earnings on Nov. 3.

Earlier this year, CVS launched a virtual primary care program, which offers customers with virtual access to a national network of physicians as well as in-person services at the company’s MinuteClinic locations. About 750,000 members will be eligible to use the service by Jan. 1, 2022, Lynch said.

“They have all the pieces, between a strong loyalty program, an intuitive app, and the ability to do pharmacy delivery,” Chilton Trusts’ Foster said. “What they need is to continue to integrate these pieces to make it super easy for the consumer to be served in the way that best fits the consumer’s preferences.”

CVS likely will disclose more about its strategic plan during its Dec. 9 investor day in New York.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

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