(Source: Business Wire)
Fitch Ratings has assigned a 'BBB+' rating to CVS Caremark Corp.'s (NYSE: CVS) new $1.5 billion 6.125% senior unsecured notes due Sept. 15, 2039. Proceeds from the offering will be used to reduce outstanding commercial paper borrowings, which stood at $1.3 billion at June 30, 2009 and for other general corporate purposes. The bonds include change of control provisions. The Rating Outlook is Stable.
The rating reflects CVS' continued strong comparable sales growth and operating margin improvement which have led to solid free cash flow generation and improved credit metrics. The ratings consider the company's scale and strong brand recognition, leading market shares and operating metrics, its successful track record of integrating acquisitions, as well as the recession-resistant nature of drugstore retailing. Of concern are lower industry script trends due to the lack of new drugs and lower utilization; potential cuts in prescription reimbursement rates and any weakness in front-end sales. In addition, significant share buyback activity could preclude CVS from deleveraging its balance sheet.
CVS is well-positioned in all prescription distribution channels - retail, mail and specialty - and is the largest provider of prescriptions in the U.S. with an approximate 19% share of 2008 retail prescription volume. Fitch expects CVS to continue to drive share gains and capitalize on positive industry dynamics such as increasing utilization of drugs by seniors, the continued growth in higher-margin generics and growth in specialty. The company is also working on several new initiatives to leverage its integrated platform that could generate incremental revenue longer term.
Of the traditional drugstore market (pharmacy and front-end sales at chains and independents), CVS has a 24% share (based on NACDS estimates for year end 2008 sales for all traditional drug stores) on a store base of over 7,000 stores. It has one of the highest sales productivity metrics in the industry, with annual retail sales per square foot of over $840 versus approximately $680 on average for its publicly traded peers. The company has a successful track record of integrating large scale retail acquisitions over the past ten years, while maintaining a healthy level of growth and improving profitability on an organic basis. Retail operating EBIT margins have improved to 6.9% for the latest twelve months (LTM) ended June 30, 2009 from 5.2% in 2003 on strong organic comparable store sales growth, operational efficiencies and contribution from generics.
