A Comparison of Profitability and Performance Ratios Between CVS Caremark and Walgreens

Running head: A COMPARISON OF PROFITABILITY AND PERFORMANCE RATIOS

BETWEEN CVS CAREMARK AND WALGREENS 1

A Comparison of Profitability and Performance Ratios between CVS Caremark and Walgreens

Matthew Cherry, Brian S. McDaniel, and Patrick Sumara

Benedictine University

A COMPARISON OF PROFITABILITY AND PERFORMANCE RATIOS BETWEEN CVS

CAREMARK AND WALGREENS 2

Table of Contents

Measuring the Company’s Profitability .............................................................................. 3

Profit Margin Ratio ......................................................................................................... 3

Return on Assets Ratio.................................................................................................... 3

Return on Equity Ratio ................................................................................................... 4

Discussion ........................................................................................................................... 5

Profit Margin ................................................................................................................... 5

Return on Assets ............................................................................................................. 6

Return on Equity ............................................................................................................. 7

Conclusion .......................................................................................................................... 7

References ........................................................................................................................... 9

Appendix A ....................................................................................................................... 10



A Comparison of Profitability and Performance Ratios between CVS Caremark and Walgreens

Measuring the Company’s Profitability

This paper examines the three key financial ratios between CVS Caremark and

Walgreens for the years ending 2008 to 2012. We present the profit margin, return on assets, and

return on equity of CVS, compare those same ratios to results for Walgreens with commentary,

and then answer questions relevant to our conclusion about CVS.

Profit Margin Ratio

Profit margin measures the net income produced by each dollar of sales (Needles, 2012).

Applying this formula to the financial statements of CVS Caremark, we see that profit

margin peaked in FY2009 at 18.13%. This is the result of efficiencies gained after the merger of

CVS with Caremark in late FY2008. The improved efficiencies do not appear to have generated

long-term impact on the company as the profit margin slid during the two following years. Profit

increased slightly in FY2012, led by increased prescription reimbursements because of the public

dispute between Walgreens and Express Scripts that year.

2008 2009 2010 2011 2012

Net Income $ 3,212 $ 3,696 $ 3,427 $ 3,461 $ 3,877

Net Sales $ 18,290 $ 20,380 $ 20,257 $ 20,561 $ 22,506

Profit Margin 17.56 % 18.13 % 16.92 % 16.83 % 17.23 % Table 1: CVS Profit Margin (2008-2012)

When compared to the industry average (n=23.99%), we see that CVS has

underperformed its peers significantly.

Return on Assets Ratio

Return on assets measures a company’s overall earnings power (Needles, 2012). This

ratio gives an idea as to how efficient management is at using its assets to generate earnings.



Applying this formula to the financial statements of CVS Caremark, we see stable results

overall, with both net income and total assets growing at a similar rate. In FY2009, net income

peaked at approximately $3.7-billion and generated a higher than average ROA.

2008 2009 2010 2011 2012

Net Income $ 3,212 $ 3,696 $ 3,427 $ 3,461 $ 3,877

Total Assets $ 60,960 $ 61,641 $ 62,169 $ 64,543 $ 65,912

Avg. Total Assets $ 57,841 $ 61,301 $ 61,905 $ 63,356 $ 65,228

Return on Assets 5.55 % 6.06 % 5.54 % 5.46 % 5.94 % Table 2: CVS Return on Assets (2008-2012)

When compared to the industry average (n=6.8%), we see that CVS has underperformed

its peers marginally. However, we see an upward trend of total assets beginning in FY2008.

The steady increase of assets appears to be intentional as CVS accelerated acquisitions of other

companies as a way to grow their business through market share. CVS acknowledges the

temporary inefficiency in their annual report, saying, “When the economy rebounds…we will

have outstanding, well-run assets in place.”

Return on Equity Ratio

Return on equity measures the return to stockholders, or the profitability of stockholders’

investments (Needles, 2012).

Applying this formula to the financial statements of CVS Caremark, we see consistent

results over the five-year period beginning in FY2008. There is a variance in FY2009 as net

income rose by 15% year-over-year. The lead cause of the increase was the result of the CVS

acquisition of Longs Drug Store, which generated $6.6-billion compared to FY2008.

2008 2009 2010 2011 2012

Net Income $ 3,212 $ 3,696 $ 3,427 $ 3,461 $ 3,877



Stockholders’ Equity $ 34,574 $ 35,768 $ 37,700 $ 38,051 $ 37,704

Avg. Stockholders’ Equity $ 32,948 $ 35,171 $ 36,734 $ 37,876 $ 37,878

Return on Equity 9.75 % 10.51 % 9.33 % 9.14 % 10.24 % Table 3: CVS Return on Equity (2008-2012)

When compared to the industry average (n=12.17%), we see that CVS has

underperformed its peers marginally. This factor is not a significant concern, however, as CVS

has the largest market capitalization of its peers.

Discussion

Having calculated the profitability and performance ratios for CVS, we now turn to

Walgreens. We calculated the same ratios (profit margin, return on assets, and return on equity)

and then compared them to gain insight into the operation of both companies, CVS in particular.1

Profit Margin

During the five-year comparison period, CVS reported higher profit margins. As

previously discussed, profit peaked in FY2009 as the result of the merger between CVS and

Caremark. On the other hand, Walgreens’ profit swung sharply between FY2011 and FY2012.

1 See Appendix A for the Walgreens calculations.

17.56% 18.13%

16.91% 16.83% 17.22%

12.96%

11.13% 11.01%

13.24%

10.45%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

2008 2009 2010 2011 2012

CVS Walgreens



In FY2011, Walgreens’ profit margin greatly benefitted from management’s decision to

restructure debt. The company successfully improved net income by reducing debt payments. In

the following year, Walgreens’ profits plummeted after a major dispute with Express Script, one

of the largest pharmacy benefits management companies in the United States. The two

companies were unable to agree to payment terms of a new contract. As a result, Walgreens

made the strategic decision not to work with Express Scripts, a decision that severely hurt

revenue and forced the company to concede later in the year. (Wahba & Krauskopf, 2011)

Both companies were below industry average for profit margin in FY2012.

Return on Assets

The dispute with Express Scripts also greatly impaired Walgreens’ Return on Assets in

FY2012. As you can see from the chart below, Walgreens suffered a significant in performance

because net income declined significantly. CVS, on the other hand, saw improved return on

assets because of the shift in consumer purchasing during the Walgreens/Express Scripts feud.

5.53% 6.03%

5.54% 5.46% 5.94%

10.34%

8.44% 8.13%

10.10%

6.98%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2008 2009 2010 2011 2012

CVS Walgreens



Walgreens had a profit margin that was slightly higher than the industry average in

FY2012, while CVS was below industry average.

Return on Equity

The troubles with Express Script could not have come at a worse time for Walgreens. In

FY2011, Walgreens tendered an offer to acquire Swiss health and beauty products retailer

Alliance Boots for cash and stock. In June 2012, Walgreens paid $6.5-billion in cash for a 45%

equity position in Alliance (Felsted, Gelles, & Jopson, 2012). The company recorded a $4-

billion cash expense as well as an 83.4-million share increase in treasury stock. These two

events led to a 22.8% increase in Shareholders’ Equity in FY2012, significantly reducing

stockholder returns that year.

Both companies were below industry average for return on equity in FY2012.

Conclusion

CVS Caremark considers itself to be an “industry-leading PBM business, retail

pharmac[y], and retail health [clinic]” (CVS Caremark, 2012). It is their goal to provide greater

9.74% 10.50%

9.32% 9.13% 10.24%

17.99%

14.72% 14.53%

18.55%

12.01%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

2008 2009 2010 2011 2012

CVS Walgreens



access, convenience, and choice to pharmacy care; to deliver solutions that improve the health of

their customers; and to lower the overall cost of health care. They utilize their dominate market

position, access to cash and credit, and business process to deliver on these goals.

Based upon our analysis, we believe that CVS is well-positioned to meet the financial

goals stated in the Management Interview. The company maintains a consistent profit margin

overall and uses surplus cash to acquire other businesses that management believes will aid long-

term growth. When compared to Walgreens, we believe that CVS is the more financial stable

organization.

There are a variety of prospects for future growth, according to management. The

company will place particular focus on Medicare Part D as a revenue source, but also plans to

position itself to take advantage of overall health care reform in the United States. We believe

that the company can continue at its present growth rate using this strategy.



References

CVS Caremark. (2012, February 25). Annual Reports. Retrieved from CVS Caremark:

http://thomson.mobular.net/thomson/7/3280/4593/

Felsted, A., Gelles, D., & Jopson, B. (2012, June 19). Walgreens aims global with Boots tie-up.

Retrieved from Financial Times: http://www.ft.com/intl/cms/s/0/69c41626-ba2a-11e1-

aa8d-00144feabdc0.html#axzz2LydhWk5c

Needles, J. B. (2012). Financial Accounting. Mason, OH: South-Western, Cengage Learning.

Wahba, P., & Krauskopf, L. (2011, December 30). Walgreen preps customers for loss of Express

Scripts. Retrieved from www.Reuters.com:

http://www.reuters.com/article/2011/12/30/us-walgreen-idUSTRE7BK0TJ20111230



Appendix A

Financial Ratios for Walgreens

2008 2009 2010 2011 2012

Net Income $ 2,157 $ 2,006 $ 2,091 $ 2,714 $ 2,127

Net Sales $ 16,643 $ 17,613 $ 18,976 $ 20,492 $ 20,342

Profit Margin 12.96 % 11.38 % 11.01 % 13.24 % 10.45 % Table 4: Walgreens Profit Margin (2008-2012)

2008 2009 2010 2011 2012

Net Income $ 2,157 $ 2,006 $ 2,091 $ 2,714 $ 1,986

Total Assets $ 22,410 $ 25,142 $ 26,275 $ 27,454 $ 33,462

Avg. Total Assets N/A $ 23,776 $ 25,709 $ 26,865 $ 30,458

Return on Assets 10.34 % 2 6.06 % 5.54 % 5.46 % 5.94 %

Table 5: Walgreens Return on Assets (2008-2012)

2008 2009 2010 2011 2012

Net Income $ 2,157 $ 2,006 $ 2,091 $ 2,714 $ 1,986

Stockholders’ Equity $ 12,869 $ 14,376 $ 14,000 $ 14,847 $ 18,236

Avg. Stockholders’ Equity N / A $ 13,623 $ 14,488 $ 14,624 $ 16,542

Return on Equity 17.99 % 3 14.73 % 14.53 % 18.56 % 12.01 %

Table 6: Walgreens Return on Equity (2008-2012)

2 Return on Asset information for FY2008 provided by Morningstar

3 Return on Equity information for FY2008 provided by Morningstar.

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A Comparison of Profitability and Performance Ratios Between CVS Caremark and Walgreens