1

NOVEMBER9,2016

DEBORAHWEINSWIG,MANAGINGDIRECTOR,FUNGGLOBALRETAIL&TECHNOLOGYDEBORAHWEINSWIG@FUNG1937.COMUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2016TheFungGroup.Allrightsreserved.

CVS Pharmacy [CVS] 3Q16 Results: Mixed Quarter; Company Reduces and Narrows

Guidance Range

3Q16 3Q15 YoYChange

Revenues(USDBil.) $44.6 $38.6 15.5%

GrossMargin 16.8% 17.2% (44)bps

SG&A/Sales 10.5% 11.2% (72)bps

OperatingMargin 6.3% 6.0% 28bps

AdjustedEPS $1.64 $1.28 28.0%

Source:Companyreports/FungGlobalRetail&Technology

• CVSreported3Q16adjustedEPSof$1.64,up28.0%yearoveryearandbeatingthe$1.57consensusestimate.Revenueswere$44.6billion,up15.5%yearoveryear,missingthe$45.3billionconsensusestimate.

• Pharmacy Services was the fastest-growing segment, with revenues up 19.2%year over year, to $30.4 billion; revenues in the Retail/Long-Term Care (LTC)segmentgrewby12.5%.

• The company reduced and narrowed its 2016 adjusted EPS guidance range to$5.77–$5.83from$5.81–$5.89.Preliminary2017adjustedEPSguidanceis$5.77–$5.93,belowtheconsensusestimateof$6.53.

3Q16RESULTSCVSreported3Q16revenuesof$44.6billion,up15.5%yearoveryearandmissingthe$45.3billionconsensusestimate.

Adjusted EPS was $1.64, up 28.0% year over year and beating the $1.57 consensusestimate.GAAPEPSfromcontinuingoperationswas$1.43,comparedwith$1.10intheyear-agoquarter.

PHARMACYSERVICESSEGMENTPharmacy Services segment revenues grew by 19.2% year over year, to $30.4 billion,whichwasbelowtheconsensusestimateof$31.0billion.Growthwasprimarilydrivenby increased pharmacy network claim volume and growth in specialty pharmacy.ManagementcommentedthatthePBMbusinessexceededexpectationsinthequarter.

• Pharmacynetworkclaimsprocessedduringthequarter increasedby23.3%yearoveryear,to282.6million,owingtogrowthinnetnewbusiness.

• Mail choice claims processed during the quarter increased by 2.5%, to 22.4million,drivenbythecontinuedadoptionofthecompany’sMaintenanceChoiceofferings.

RETAIL/LTCSEGMENTRetail/LTC segment revenuesgrewby12.5%, to$20.1billion, slightlybelow the$20.2billionconsensusestimate.Segmentrevenuesweredrivenbytheadditionofthelong-term care pharmacy operations acquired fromOmnicare and the addition of Target’spharmaciesandclinics,plusstoresalesgrowth.Managementcommentedthattheretailbusinessperformedatthelowerendofexpectationsinthequarter.

2

NOVEMBER9,2016

DEBORAHWEINSWIG,MANAGINGDIRECTOR,FUNGGLOBALRETAIL&TECHNOLOGYDEBORAHWEINSWIG@FUNG1937.COMUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2016TheFungGroup.Allrightsreserved.

Same-storesalesincreasedby2.3%.

Pharmacy same-store sales rose by 3.4% and pharmacy, negatively affected byapproximately 340 basis points from recent generic drug introductions. Same-storeprescriptionvolumesincreasedby3.0%onamonthlyequivalentbasis.

Front-storesame-storesalesdecreasedby1.0%,affectedbysoftercustomertrafficthatwaspartiallyoffsetbyanincreaseinbasketsize.

Inthequarter,thegenericdispensingrateinthePharmacyServicessegmentincreasedbyapproximately160basispoints,to85.4%,andincreasedbyapproximately100basispointsintheRetail/LTCsegment,to85.8%.

OUTLOOKFull-Year2016The company lowered and narrowed its 2016 adjusted EPS guidance to $5.77–$5.83from $5.81–$5.89. CVS also lowered and narrowed its GAAP EPS guidance to $4.84–$4.90from$4.92–$5.00.

Managementcommentedthatrecentpharmacynetworkchangesareexpectedtocausesomeretailprescriptionstobegintodepartthecompany’spharmaciesthisquarter.

In addition, CVS is currently experiencing slowing prescription growth in the overallmarket as well as a soft seasonal business. The combination of these factors led thecompanytoreducethemidpointofitsannualguidanceforthisyearby$0.05pershare.

4Q16For the fourth quarter, the company expects adjusted EPS of $1.64–$1.70, up 7%–10.75%yearoveryear,butbelowtheconsensusestimateof$1.79.

Full-Year2017CVS provided a preliminary outlook for 2017: the company expects adjusted EPS of$5.77–$5.93,belowtheconsensusestimateof$6.53.

Thecompanycontinuestotarget10%adjustedEPSgrowthforthelongerterm.

3

NOVEMBER9,2016

DEBORAHWEINSWIG,MANAGINGDIRECTOR,FUNGGLOBALRETAIL&TECHNOLOGYDEBORAHWEINSWIG@FUNG1937.COMUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2016TheFungGroup.Allrightsreserved.

DeborahWeinswig,CPAManagingDirectorFungGlobalRetail&TechnologyNewYork:917.655.6790HongKong:852.6119.1779China:86.186.1420.3016deborahweinswig@fung1937.comJohnHarmon,CFASeniorAnalyst

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