DBRS Assigns Ratings of R-1 (low) and A (low) to CVS
ConsumersDominion Bond Rating Service (“DBRS”) has today assigned ratings of R-1 (low) to the Commercial Paper and A (low) to the Senior Unsecured Debt of CVS Corporation (“CVS” or the “Company”). The trends are Stable.
The ratings and trends are supported by the following: (1) favourable industry trends (including demographics), leading to higher demand for prescription drugs; (2) strong market shares in local markets and nationally; (3) advantages of scale (e.g. in purchasing) resulting from its size [operates second-largest U.S. drug store chain and fourth-largest U.S. pharmacy benefit management (PBM) business]; (4) strong brand name supported by a reputation for quality service; and (5) ownership of a PBM mitigates the pressures on retail drug stores from the growing presence of alternative delivery methods (including the rise of the mail order channel).
Notwithstanding these strengths, CVS’s ratings are constrained by the following factors: (1) certain key credit metrics (e.g. cash flow from operations-to-total debt of 0.22) are relatively weak for the rating and are the result of a large acquisition in F2004 (the Eckerd transaction) and the Company’s ongoing store development activities. These metrics, however, have improved following the acquisition. The improvement should continue due to growth in operating cash flows, debt reduction, and the expectation that cash returns to shareholders will continue to be minimal. Credit metrics would further improve if the Company would slow the pace of its store development, which is a key component of its organic growth. However, with many opportunities to expand in attractive markets, this pace is expected to continue in the near term; (2) the drug store business is highly competitive, with intensifying competition from both retail and non-retail (e.g. mail order) channels; (3) while total same store sales growth remains strong (around 6%), it is below historical levels. Pharmacy sales growth has fallen (e.g. due to growth of mail order channel, slow-down in new drug introductions); and (4) margins in the drug store industry are being pressured by concerns about rising healthcare costs and resulting efforts of all third-party payers to reduce prescription drug costs.
On July 31, 2004, CVS purchased 1,268 Eckerd drugstores and a PBM business from J.C. Penney Company, Inc. for US$2.13 billion in a debt-financed acquisition. Although this caused credit metrics to weaken at first, the initial integration went very smoothly. This acquisition has resulted in a much stronger presence in two high-growth states (Florida and Texas) and the strengthening of the Company’s PBM business (now the fourth-largest in the U.S., with a strong mail order business).