Are CVS store closures prescription for better financial health?

Key Points

• CVS plans to close dozens of pharmacies in Target stores beginning in February.
• The retail pharmacy industry has been grappling with challenges, impacting CVS, Walgreens and Rite-Aid.
• CVS's long-term strategy includes closing around 900 stores and shifting towards becoming a healthcare-focused company.

After CVS Health Corp. NYSE: CVS said it would shutter dozens of pharmacies in Target Corp. NYSE: TGT stores, the stock immediately declined by 3%, but in the January 16 session was bucking the broad market downturn with a gain of 0.71%.

Overall, the retail pharmacy industry has been fighting an uphill battle. 

Target stock was flat for the session, outperforming a market selloff driven by worries about slower-than-anticipated Federal Reserve rate hikes this year.

A little background on the pharmacy industry, to give context to CVS’ move: CVS has been moving into the managed care industry and is tracked with healthcare stocks in the Health Care Select Sector SPDR Fund NYSEARCA: XLV.

In the past, the company has said its retail pharmacies are key tentpoles of its managed care strategy. However, the retail pharmacy industry as a whole has struggled.

Pharmacy closures begin in February

CVS said it would close the Target pharmacies between February and April. 

The company said in 2023 that it would slash costs, meaning thousands of layoffs, as it pivots more in the direction of healthcare and away from the retail pharmacy business. 

CVS bought Target’s pharmacy business in 2015 for $1.9 billion. It’s operated pharmacies inside Target stores since then, with a presence inside about 1,800 Target stores. In total, CVS operates about 9,000 pharmacy locations in the U.S. 

In 2021, the company said it would begin the process of closing about 900 stores, part of the move toward becoming a healthcare company instead of a retailer. CVS has been on the path toward closing locations. It’s also made acquisitions of healthcare producers and a chain of primary care facilities for senior citizens. 

The company reportedly said employees affected by the Target location closures would be offered jobs elsewhere in the company.

Target has not yet commented on the pharmacy closures.

Investors growing optimistic about CVS? 

The CVS chart shows the stock rallied with the broad market in December, but it’s been in a long decline since late 2022. The stock ended the January 16 session near the top of its daily trading range, a good sign of investor optimism. 

In addition to CVS, the other publicly traded U.S. pharmacy chains are Walgreens Boots Alliance Inc. NASDAQ: WBA and Rite-Aid Corp. NYSE: RAD.

Walgreens is expected to see an earnings decrease of 19% this year after several quarters in a row of net income decline. The company’s earnings rose in 2021 and 2022, but as foot traffic due to Covid medications slowed, earnings and revenue both declined.

Walgreens stock has had a rough road. The stock has not posted a gain on a one-year, five-year or 10-year basis. It’s eked out a small gain in the past month, but the longer term doesn’t signal the best financial health. 

Walgreens slashed dividend, cutting costs

The Walgreens dividend was recently slashed, another sign of a tenuous financial condition.  

Walgreens recently said its efforts to cut $1 billion in expenses this year were well underway. In its most recent quarterly earnings call in early January, CEO Tim Wentworth said, “Everything is on the table to deliver greater shareholder value.” 

Walgreens stock has been whipsawed since its earnings report, and finished the January 16 session just a shade below its 50-day moving average. It’s at a critical juncture right now which will determine whether or not it will bounce off that line or continue declining. 

Penny stock Rite-Aid in bankruptcy protection

Walgreens has also been acquiring healthcare-related businesses, although it’s streamlining in that area with some planned facility closures this year. 

Rite-Aid is currently in bankruptcy protection, and on January 16 said it was closing stores this year. In addition to decreased traffic from Covid treatments, Rite-Aid is also facing a heavy debt burden and lawsuits over over-prescriptions of opioid products. 

Rite-Aid, which has become a penny stock, has also made noises about leaning into the healthcare industry, has too many problems on its hands at the moment to make a significant business shift.