CVS Health Corporation (CVS Quick QuoteCVS - Free Report) reported second-quarter 2016 adjusted earnings per share (EPS) of $1.32, up 8.2% year over year. The adjustment considers certain asset amortization, acquisition-related integration costs and the loss on early extinguishment of a debt.

The quarter‘s EPS was ahead of the Zacks Consensus Estimate by 2 cents and also exceeded the company-provided guidance range of $1.28−$1.31.

Without the one-time adjustments, reported EPS in the second quarter declined 23.2% year over year to 86 cents.

The Quarter Under Review

Net revenue in the second quarter, although increased 17.6% year over year to $43.7 billion, it missed the Zacks Consensus Estimate of $44.3 billion. The year-over-year improvement came primarily on the back of balanced growth in both the Pharmacy Services and Retail Pharmacy segments.

Pharmacy Services revenues increased 20.7% to $29.5 billion in the reported quarter. The segment gained from growth in the specialty pharmacy business and increased volume in pharmacy network claims.

Pharmacy network claims processed during the quarter went up 22.6% to 280.5 million, backed by net new business growth. Moreover, the continued adoption of Maintenance Choice offerings brought the Mail Choice claims processed to 22.2 million, up 3.9%.

Revenues from CVS’ Retail/ LTC improved 16% year over year to $20 billion, primarily driven by the addition of long-term care (LTC) operations acquired as part of the Omnicare acquisition, the addition of the pharmacies and clinics of Target Corporation that were acquired in Dec 2015, and pharmacy same store sales growth. Same-store sales improved 2.1%, while front-end same-store sales were down 2.5% year over year.

Front-end same-store sales were sluggish due to the negative effect of the shift of Easter from April in 2015 to March in 2016, which resulted in a decrease in front store same store sales of approximately 80 basis points. Apart from that, softer customer traffic hampered growth which was partially offset by an increase in basket size.

Pharmacy same-store sales increased 3.9% in the reported quarter. Pharmacy same store sales were negatively affected by approximately 355 bps due to recent generic drug introductions. Moreover, Pharmacy same-store prescription volumes rose 3.5% on a 30-day equivalent basis.

The generic dispensing rate (the proportion of all generic prescriptions to total number of prescriptions dispensed) soared 155 bps to reach 85.4% in the Pharmacy Services segment and increased 110 bps to 86.1% in the Retail/LTC segment.

Although gross profit rose 9.6% to $7 billion, gross margin contracted 118 bps to 16%. Total operating margin during the quarter contracted 71 bps to 5.4% due to a 12.7% increase in operating costs.

CVS exited the second quarter of 2016 with cash and cash equivalents and short-term investments of $1.21 billion, as against $1.86 billion at the first quarter. Year-to-date net cash provided by operating activities was $2.02 billion, up 33.1% from the year-ago period.

During the second quarter, CVS opened 20 retail stores and 24 new retail stores, two onsite pharmacies and closed 10 stores. Further, the company relocated 9 retail stores. As of Jun 30, 2016, CVS operated 9,652 retail stores, including pharmacies in Target stores in 49 U.S. states, as well as the District of Columbia, Puerto Rico and Brazil.

Updated 2016 Guidance

CVS Health has raised its full-year 2016 earnings expectations. The company currently expects to deliver adjusted EPS in the range of $5.81–$5.89 (from earlier expectation of $5.73–$5.88). The current Zacks Consensus Estimate for CVS Health is pegged at $5.82 for 2016, within but close to the lower-end of the predicted range.

The company also raised its cash flow guidance for 2016. It currently expects to deliver free cash flow of $6.3–$6.6 billion ($5.9–$6.2 billion), and cash flow from operations of $8.8–$9.1 billion ($7.6–$7.9 billion) in 2016.

CVS Health has also provided its third-quarter 2016 adjusted EPS projection. The company forecasts adjusted EPS in the range of $1.55−$1.58. The current Zacks Consensus Estimate of $1.55 is at par with the lower end of the guided range.

Our Take

CVS Health posted better-than-expected second-quarter result with respected to adjusted EPS while revenues missed the Zacks Consensus Estimate. Nonetheless, the year-over-year growth remained impressive with the Pharmacy Services segment benefiting from growth in the Specialty Pharmacy business and the Retail Pharmacy segment gaining from increased same-store sales.

We take note of the recently completed Omnicare and Target Pharmacy acquisitions, which are currently undergoing the integration process. According to the company, both the acquisitions are strategic fits. CVS Health expects to benefit with multiple opportunities for driving enterprise value from Omnicare and Target in both the near and long term.

Zacks Rank

Currently, the stock carries a Zacks Rank #3 (Hold). Some top-ranked stocks in the broader healthcare sector are LeMaitre Vascular, Inc. (LMAT Quick QuoteLMAT - Free Report) , NuVasive, Inc. and Quidel Corp. (QDEL Quick QuoteQDEL - Free Report) . All the three stocks sport a Zacks Rank #1 (Strong Buy).

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