CVS's move to ban cigarette sales earlier this year seems to be paying off.
Revenue jumped 9.7 percent in CVS' latest quarter from the same period a year ago, the company, which has rebranded itself as CVS Health, reported on Tuesday. That was due in part to a nearly 16-percent gain in revenue for CVS's pharmacy services, which rose to $22.5 billion in the quarter from $19.4 billion a year earlier.
The gain in pharmacy-services revenue helped offset a 4.5-percent year-over-year drop in sales in what is known as the "front of the store" -- where things like magazines, candy, greeting cards and toothpaste are sold -- in stores open a year or more. And that drop was due to the end of cigarette sales, CVS said.
This all fits into CVS’s grand strategy to rebrand itself as a more healthful company, said Vishnu Lekraj, an analyst who covers CVS for the investment research firm Morningstar.
CVS's pharmacy services trade, where the 16-percent increase in revenue occurred, is where the company earns big bucks by contracting with large employers and insurance companies to administer prescription-drug coverage. And it can better attract corporate partners with a healthier brand, Lekraj said.
"They can’t market themselves as a health-care servicer when they’re selling one of the most unhealthy products around,” he said.
Front-of-store sales at CVS will keep falling in the near term, but that doesn't really matter, Lekraj said. The money that CVS can earn by grabbing a larger portion of the country's expanding health-care market will likely outweigh the annual $2 billion it loses through cigarette sales, which only made up a small percentage of its revenue in the first place.
Health-care spending in the U.S. is projected to grow by 5.6 percent this year and by another 6 percent a year from 2015-2023, according to predictions by federal auditors. There are millions of people newly insured by the Affordable Care Act. And CVS is also turning itself into a low-budget doctor's office: The company has more than 900 "Minute Clinics" nationwide that offer quick service for things like flu shots or blood-pressure tests, luring in customers who may not want to wait (or travel) to see a doctor.