Several political issues may have bearing on commerce in months and years ahead. Though it appears to have been delayed in a $1.9 trillion Covid-19 relief bill that is working its way through our federal legislature, the minimum wage will probably go up. Taxes will probably go up also. Drug pricing is a continuous focus and it does not matter what party is in power. The message has been the same: prescription drugs are too expensive.
The minimum wage matters at some retail establishments. If a company is doing well, enjoying higher receipts at store fronts that have been open for a year or so, then it typically makes money on its employee cost. Not all retail businesses are so vibrant.
Rising costs can be problematic for margins. The corporations that are probable to have the most difficulty are those who cannot pass multiple expenses on to their customers, those who cannot raise prices. CVS Health and Walgreen’s are retail pharmacy businesses and eCommerce has created all sorts of relevant problems for them.
Pharmacy stores have also been struggling with online sales for years. One of the key aspects of their business is selling generic products side by side with name brands. (They also sell candy, as opposed to health food, near the registers). For example, a generic bottle of acetaminophen can be priced substantially lower than Tylenol and the company enjoys a better profit margin when its customers choose to save money on a cheaper item. However, what if those customers are purchasing the product online from Amazon.com or Walmart instead?!
“Front of store” accounts for 21% of retail revenue, and 7.3% of overall revenue, at CVS Health.
Meanwhile, Walmart is dropping a $35 minimum on its two hour delivery service. This is in competition with Amazon.com’s “Prime Now” service, which continues to have a $35 minimum. There is the possibility of Amazon.com, or another competitor, also lowering or eliminating its delivery fee to match.
Though rates were lower when the merger closed, the company’s debt continues to enjoy investment grade ratings. Standard and Poor’s assigns CVS Health BBB. Moody’s rates it Baa2, but changed the outlook to Negative from Stable, as of December 2020. CVS Health continues to pay off its long term liabilities and should owe approximately $53 billion worth; which can in turn slightly lower its interest payments from the $2.9 billion it paid in 2020.
Trouble is, if you are concerned about a health issue, are you seeking out the lower cost options, such as treatment by a nurse? A nurse can provide effective care. It is still an observation that the company has had difficulty with technological change and needs to pursue brick and mortar solutions. Health insurance combined with low cost services is a lifesaver for the retail business of selling Lifesavers that is in decline!
However, CVS Health should continue to have long term horizons. Its pharmacies have shown high same store sales data, which might be attributable to Aetna; front of store is usually below 1% though. There is also a need for health insurance.
It is not clear if CVS can discontinue Aetna’s name from its brand. Personally, I would rather invest in a health insurance company. My account owns shares of Progyny (PGNY), though at a substantially lower price than is available currently.
Additionally, in the near future, if a stimulus bill is passed, CVS may witness an uptick in sales. Covid-19 testing has been helping results and stimulus could coincide with administration of Covid-19 vaccines at its physical locations. Thus, there are reasons to suspect near-term data to be positive–though they should be incorporated in current consensus estimates–that have come down since 30 days ago.
To summarize, there could ultimately be a federal increase to the minimum wage and CVS employs cashiers, clerks, and pharmacy technicians who might then enjoy higher pay. It appears that most of the business can absorb a cost increase, but not the front of store section. There is also the possibility of greater progressivity in taxation. Corporations that include CVS Health, and highly-paid employees such as Mr. Merlo and new hires that are being thrown at the front of store problem, would have a higher tax bill.
Meanwhile, CVS Health has struggled to deal with the advent of eCommerce, which may not make it easier to raise any prices. Even if it can, the cost of prescription drugs is a persistent political issue. Thus, there are several reasons to consider alternatives to shares of CVS in any post-pandemic world.
***The author owns PGNY stock.
5/26/21 Apparently Amazon.com may enter the retail pharmacy business