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CVS converting Eckerds, but profits to come later

But Wall Street likes the reported progress toward integration and boosts CVS' share price.

By MARK ALBRIGHT
Published February 3, 2005

Half of the more than 660 Eckerd drugstores in Florida have been switched to CVS in the past three months, but the new owners don't expect the benefits to show up in the bottom line until late summer.

"The integration of Eckerd is going extremely well," said Tom Ryan, chief executive officer of CVS Corp., which in July paid $2.15-billion for Eckerd stores in Florida and Texas and its mail-order pharmacy. "We hope to have the other half remodeled to CVS by July."

The Woonsocket, R.I., chain, which used the purchase to accumulate 5,400 stores and surge ahead of industry-leading rival Walgreen Co., gave the update Wednesday as it reported a 12 percent increase in fourth-quarter earnings.

Net income rose to $295.6-million, or 70 cents a share, up from $263.4-million, or 64 cents a share, in the same quarter a year ago. With Eckerd in the fold, CVS sales leaped 20 percent to $8.92-billion, but profits were held back by investments to fix Eckerd.

Much of the credit for improved earnings goes to a court ruling that freed $60-million the company had been keeping as a reserve for income taxes.

For the 2004 fiscal year, CVS reported net income of $959.3-million, or $2.30 a share, up from $832.7-million, or $2.06 a share.

CVS projects earnings of $2.65 to $2.68 a share during the 2005 fiscal year. About 15 cents of that is forecast from the Eckerd stores, which are expected to be contributing to earnings by August. The company expects profit margins to be squeezed by the purchase through the first half of 2005.

Wall Street liked the report. CVS shares rose $1.72 a share to close at $48.26, a 52-week high.

"Any time a company makes a major purchase, you can always get hit with the unknown," said David Katz, a portfolio manager with Matrix Asset Management which has a stake in CVS. "Each quarter and month they put more of the uncertainty behind them."

Information from Bloomberg Financial News was used in this report. Mark Albright can be reached at albright@sptimes.com or 727 893-8252.

[Last modified February 3, 2005, 01:07:17]