Wall St

By Larry Dignan  |  Posted 2004-11-11 Print this article Print

CVS said there was only one way to deal with Eckerd's information systems: Burn 'em down.

. Watching"> Wall Street is closely watching not only how quickly CVS can put its systems in place but how fast the company can turn around weak performance at the Eckerd stores.

"The business we acquired was declining, so there's a lot of work to do," said Rickard on the conference call.

Indeed, CVS expects the Eckerd acquisition to initially hurt results. For 2003, CVS had sales per store of $6.4 million. Adding Eckerd to the family will knock sales per store down to $5.7 million. Sales per square foot is expected to decline to $708 in 2004, down from $816 in 2003. Growth in same-store sales for CVS is now expected to be in the range of 1% to 2% for 2004, down from a previous projection of 2% to 3%.

Eckerd's performance this year is elusive. Former parent J.C. Penney classified the chain as a discontinued operation when it was planning the sale. For the third quarter ended Oct. 25, 2003, however, J.C. Penney in regulatory filings called Eckerd's results a drag on business. For that quarter, Eckerd's same-store sales were down 1%, and operating profit was more than halved to $34 million from $79 million during the previous year.

Such performance is one reason why CVS is trying to move quickly to make Eckerd more efficient. At the company's late-September meeting with analysts, CVS told Wall Street that it had made solid progress, retraining 20,000 employees, remodeling the stores and installing CVS' systems. The most critical systems CVS is installing govern automated inventory management, pharmacy workflow and loss prevention.

One big area to fix: Eckerd's shrink, a retailing term for shoplifting. At Eckerd, shrink was running 5% of front-end sales of items such as shampoo and toothpaste. Inventory was literally walking out the door. CVS' levels are estimated to be 2.2% of store sales, according to J.P. Morgan Securities estimates.

Morgan Stanley analyst Mark Wiltamuth says data showing whether CVS' systems can stem the losses won't arrive until late 2005 and 2006.

In the meantime, Wall Street will be watching. Says Wiltamuth in a research note: "We believe CVS' systems will play an important role in the Eckerd turnaround, and accordingly, we believe information-technology integration will be an important area to monitor."

Next Page: Key performance indicators: Tale of two drugstores.

Business Editor
Larry formerly served as the East Coast news editor and Finance Editor at CNET News.com. Prior to that, he was editor of Ziff Davis Inter@ctive Investor, which was, according to Barron's, a Top-10 financial site in the late 1990s. Larry has covered the technology and financial services industry since 1995, publishing articles in WallStreetWeek.com, Inter@ctive Week, The New York Times, and Financial Planning magazine. He's a graduate of the Columbia School of Journalism.

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