Business and Management
Submitted By chiaupo
Johnson & Wales University
Providence, Rhode Island
Feinstein Graduate School
Research Report: Company Resource Analysis
A Research Project Submitted in Partial Fulfillment of the Requirements for the MBA Degree
Business Policy and Strategy
Professor: Trent Theroux
Po Chiao Huang
May 1, 2014
According to my research on company resource analysis in the drug store industry, I will select the CVS Caremark Corporation as my study company.
Question 1: Whether the company's present strategy working?
CVS pharmacy services business strategy centers on providing their customer and client high quality and innovative pharmaceutical solutions, while assisting their member managing overall health care costs by leveraging CVS expertise in core PBM services. (Form -10k) (1)
Moreover, the retail pharmacy business strategy, base of the CVS pharmacy services model to maintain successful growth they focus on new store development by expanding the number of retail pharmacy stores and retail stores range in size in order to provide better service, help client lowers overall health care costs and improve health outcomes. (1)
How these strategic working?
Look into the financial performance in the Appendix 1, table 1. CVS compare well on these profitability ratios with industry averages. Most of ratios are better than the industry averages. Ventureline (2). Study the CVS’s financial report I found the company is “Solid and significant growth.” According to CVS Caremark Annual Report 2013 (3), the financial highlights show the company was significant growth during 2012 to 2013. For example, net revenues increased 3.0 percent to a record $127 billion, while adjusted earnings per share from continuing operations rose 23 percent to $4.00. CVS earned $4.4 billion in free cash flow in 2013, and returned more than $5 billion to shareholders through dividends and share repurchases. (3) CVS has a strong balance sheet and an investment grade credit rating, these numbers proved their present strategy working efficiency as well. In addition, the CVS PBM system helps them won business across customer segments and is well positioned in major growth areas. Since CVS providing PBM from 2010, its delivering $24 billion of new business for CVS over this period. The PBM has continued to play an important role for CVS Caremark Corporation. (3)
Question 2: Is the company stronger or weaker than rivals?
Profit margins: The major three players in the drug store industry are CVS Caremark, Walgreen Company, Rite Aid Corporation. Compare with these two rivals, CVS is the quality player in the industry. According to my research for these three companies’ 10-K and financial analysis on Yahoo finance. CVS has grow faster than rivals over the last 10 years and also higher profit margins in the area of 6.4% at the operating level versus operating margins near 5.1% for Walgreen, and 3.9% for Rite Aid (YCharts).
Stronger rivals – Walgreen: However, CVS major rivals Walgreen has healthy dividends over the CVS and Rite Aid Corporation. Walgreen has paid the divide more than 80 years. The company dividend annual growth rate of nearly 23% during the last five years. Walgreen pays dividend for 1.87% may one of the biggest advantages and stronger than CVS, compare with CVS dividend of 1.49% and Rite Aid did not pay the dividend (Forbes.com)(7). This could help Walgreen hook more investors who like to invest long term in the stock market. Look at forward P/E Ratio, Aid. These three companies have similar P/E Ratio (P/E Ratio: 23.75 for Walgreen, 19.65 for CVS and 31.55 for Rite Aid). But Walgreen still stronger than CVS and Rite Aid when it comes to dividend yield (7).
Weaker rivals - Rite Aid: Compare with CVS and Walgreen, Rite Aid is the smallest company in this group. “A market value below $4.5 billion versus $53.5 billion for Walgreen, and nearly $85 billion for CVS.” (Investopedia.com) Even the Rite Aid had close the unprofitable locations and focusing on cost control, it’s still hard to compete with CVS
The reason is when I research the ratio analysis report (2) between CVS and Rite Aid, I found the CVS’s ratio are much better than Rite Aid. For example, Net Profit Margin: 3.6% of CVS and 0.8% of Ritd Aid; Operating Profit to Sales 5.6% of CVS and 0.0% of Rite Aid, year end 2013.
Representative weighted competitive strength assessment
I will use the “representative weighted competitive strength assessment” as a tool to analyze this question for more detail. According to the IBISWord, there are six most important key success factors in the drug store industry: (The result of competitive strength assessment is arranged in the Appendix2, Table2)
Pharmacy benefit managers: According to Barclays Capital, U.S. “drug retail stocks increased by approximately 5% better than the S&P 500's 0.8% and the PBM index at 1.7%. CVS Caremark was the best performer with a 5.4% advance, while Walgreens increased by 3.3%.” Thus, PBM gives CVS another strong conduit of growth beyond the traditional retailing store. In the my strength assessment, CVS gains the highest score due to the reason above.
The ability to control stock on hand: Since “stock controls must be used to manage ideal inventory levels and increase sales”(IBISWorld), I am comparing theses three companies’ inventory as the weighted score basis. According to Venrureline ratio analysis report of the Inventory Turns average: 9.3 for CVS, 7.5 for Wargreen and 5.9 for Rite Aid by the end of 2013.(2) CVS gain the highest score on this factor and proved CVS turn inventory much faster than their rivals.
Superior financial management and debt management: Both companies, CVS and Wargeen have a similar debt ratio such as debt ratio (CVS 0.5, Wargeen 0.5), debt to equity (CVS 0.9, Wargeen 0.8) and equity multiplier (CVS 1.9, Wargeen 1.8) end of 2013. Thus, these two companies get the same score, but Rite Aid did a poor job on debt manage, it gets a lower score on this factor (2).
Easy access for clients, Proximity to key markets and Experienced work force
According to each company report, there are not have much difference between CVS and Wargeen on these three factors. People usually could find CVS and Walgreen at the same location. However, Rite Aid is only has 4,623 (9) stores compare CVS 7,600 (1) and Walgreen 8,221 (10). Again, Wargreen stores’ number higher than CVS, but Rite Aid still get the lowest score on this factor.
Table1. Profitability Ratios: CVS vs Drug industry
Table 2: | CVS | Walgreen | Rite Aid | Key Success Factor | Weight | Strength Rating | Weighted Score | Strength Rating | Weighted Score | Strength Rating | Weighted Score | Pharmacy benefit managers | 0.3 | 10 | 3.0 | 8 | 2.4 | 6 | 1.8 | Ability to control stock on hand | 0.3 | 8 | 2.4 | 7 | 2.1 | 5 | 1.5 | Superior financial management | 0.2 | 7 | 1.4 | 7 | 1.4 | 3 | 0.6 | Easy access for clients | 0.1 | 6 | 0.6 | 7 | 0.7 | 4 | 0.4 | Proximity to key markets | 0.05 | 6 | 0.3 | 7 | 0.35 | 4 | 0.2 | Experienced work force | 0.05 | 5 | 0.25 | 5 | 0.25 | 4 | 0.2 | Sum of weights | 1 | | Overall weighted | | | 7.95 | | 7.2 | | 4.7 |
(1) U.S. Securities and Exchange Commission, (n,d) CVS Caremark Corporation Form 10-K Retrieved from http://www.sec.gov/Archives/edgar/data/64803/000006480314000008/cvs-20131231x10k.htm (2) Ventureline.com, (2013) CVS V.S Industry Ratios
Retrieved from http://0-www.ventureline.com.helin.uri.edu/ratio-analysis-accounting-ratios/sample/publicly_traded_company_vs_industry/ (3) CVS Caremark 2013 Annual Report Retrieved from http://investors.cvscaremark.com/~/media/Files/C/CVS-IR/reports/cvs-ar-2013.pdf
(4) Yahoo finance (n, d) CVS Caremark Corporation Retrieved from http://finance.yahoo.com/q?s=cvs (5) Ycharts.com (n, d) CVS Caremark Corporation
Retrieved from http://ycharts.com/companies/CVS (6) IBIS World, (2013). Drugs store industry performance-key external drivers. IBIS World.
Retrieved from http://0-clients1.ibisworld.com.helin.uri.edu/reports/us/industry/competitivelandscape.aspx?entid=1054#KSF (7) Forbes.com (n, d) Company - Finaancial
Retrieved from http://www.forbes.com/companies.
(8) Investopedia.com (2011) Rite Aid Losses Grow Again
Retrieved from http://www.investopedia.com/stock-analysis/2010/rite-aid-losses-grow-again-rad-wag-cvs-aet-cost0928.aspx (9) Rite Aid (n,d) Our Story
Retrieved from https://www.riteaid.com/about-us/our-story. (10) Walgreens Store Count (n,d) Store count by state