Company Background
Consumer Value Stores
Consumer Value Stores (CVS) Health Corporation is a healthcare organization in the United States of America that serves citizens nationwide. Stanley Goldstein, Sidney Goldstein, and Ralph Hoagland founded the company in 1963 (Sawayd et al., 2022). The parent company’s functions included selling health and beauty product lines (Sawayd et al., 2022).
The three founders worked on growing the business’s health and beauty management elements. Several years later, the organization introduced the pharmaceutical department, expanding its portfolio and joining a new market space (Sawayd et al., 2022). CVS has undergone several transformations, including mergers with companies in different lines of business.
The continued growth of the healthcare corporation has facilitated its current state and performance. The organization is currently listed on the New York Stock Exchange. Since its inception, CVS has acquired several other companies that have contributed to its strong performance, including Aetna in 2018 (CVS Health, 2018).
Consumer Value Stores is a Fortune 500 company and ranked 4th in 2021 (Lynch, 2021). In 2021, a federal jury found the company, among others, guilty of contributing to the opioid crisis (Pierson, 2022). Despite this, CVS continues to show good financial performance that aligns with market projections.
CVS Health has grown its services to enhance convenience and customer accessibility. The organization runs retail stores nationwide and has expanded its offerings to include walk-in medical clinics, home delivery services, and a vast range of health and wellness products (CVS Health, 2018). The organization is known for its commitment to innovation, investing heavily in technology and data analysis to improve patient outcomes.
CVS strongly emphasizes sustainability, implementing numerous initiatives to reduce its carbon footprint and promote environmental conservation measures (CVS Health, 2018). Additionally, the company has a long-standing tradition of giving back to its communities, partnering with various charitable organizations to improve the health and well-being of those in need (Lynch, 2021). Despite its challenges, CVS remains a leader in the healthcare industry, offering high-quality services and products to its customers. With a strong focus on customer satisfaction and a commitment to innovation, it is no wonder the company continues to grow and thrive.
Rite Aid
Rite Aid is a healthcare organization founded as a health and beauty store. It changed its name to Rite Aid Corporation before offering its stock to the public (Zippia, 2022). The company developed a trend of consistently acquiring chain stores and opening new ones as part of its expansion strategy(Zippia, 2022). Many of the chain stores the corporation purchased were pharmacy-related and were crucial in the brand’s successful expansion (Bilbeisi, 2022). The most recent acquisition was the purchase of EnvisionRx, which also owned Smith Premier Services, Connect Health Solutions, and PBMs MedTrak. The organization has partnered with General Nutrition Corporation, Amazon, Walgreens, and Homeward.
The company has faced several cases regarding its operations and financial practices. In 2001, many customers raised concerns over the poor response to complaints, and the company promised to improve the pharmacy complaint process (Zippia, 2022). The corporation admitted to submitting false prescription claims to insurance companies and paid $1 million in fines (HHS, 2017). The acquisition of Brooks and Eckerd Stores nationwide led to several financial problems. Rite Aid reported losses and saw its share price decline significantly (Zippia, 2022). The financial implications are still being felt based on the current financial performance.
Despite these setbacks, Rite Aid has continued to grow and expand its operations. The corporation has implemented various technologies to enhance service delivery, including online services designed to increase customer access (Zippia, 2022). The company has also made significant technological investments, such as digital signage, mobile apps, and telehealth services. These efforts have helped the company to improve customer satisfaction and increase brand loyalty (Bilbeisi, 2022).
The organization has shifted its focus to providing more affordable healthcare options to its customers by introducing generic drugs and wellness programs(Zippia, 2022). Rite Aid has also been actively supporting various charitable initiatives, including disaster relief and local community initiatives. With its commitment to providing high-quality healthcare services and ongoing efforts to innovate and improve, Rite Aid remains a key player in the healthcare industry.
Industry Outlook
The healthcare sector remains a significant industry in the country. The demand for products remains high despite the decline in COVID-19 cases. Pharmaceuticals have grown significantly over the last two years, and this growth is expected to continue in this decade. The pandemic led to a sharp increase in demand for medicines due to the prevalence of diseases and their associated factors. The prevalence of lifestyle diseases is bound to continue providing the industry with consistent demand.
In the pharmaceutical industry, several companies have pursued mergers, acquisitions, and partnerships due to the sector’s narrow profit margins. CVS and Rite Aid will continue to pursue partnerships, mergers, and acquisitions based on market trends, and more business will be done between companies with growth potential. At the same time, those struggling will seek or form strategic partnerships. Overall, the pharmaceutical retail sector will continue to change in line with market conditions and individual companies’ ability to turn a profit.
Analysts’ Forecast
Analysts predict the sector will continue to grow. The country’s healthcare industry is projected to grow as demand for services rises with an aging population. Public health issues have also increased, leading to high demand and an expected rise in the following years.
The growth of the healthcare sector will also drive the pharmaceutical retail sector. Trends such as introducing new medicines to address current antibiotic resistance will drive a spike in product demand. Population demographics also support the growth, as individuals will require medication. The forecasts are a positive sign for both Rite Aid and CVS, as they will also benefit from rising demand.
Revenue, Price, Income Trend Analysis
Revenues are a crucial financial indicator for assessing a business’s performance. Organizations rely on it to measure their progress and compare themselves with competitors. CVS has experienced consistent revenue growth over the last five years. The organization had $292.1 billion in revenue in 2021, an increase from $268.7 billion in 2020. Various factors may have contributed to the rise in revenues, including the introduction of COVID-19 vaccines in 2021.
Rite Aid achieved $17 billion in revenues in 2022, an increase from the previous year. The price per share for CVS has also increased, leading to its shareholders’ highest earnings per share over the last five financial years. CVS reported $7.9 billion in net income in 2022, up from $7.1 billion the previous year.
Rite Aid did not report positive net income in 2022, recording a net loss of $538 million. The net income significantly increased from the previous year, with $91 million. The trends indicate that CVS’s financial performance is much better than Rite Aid’s.
Financial Ratio Analysis
Table 1: Profitability and Market Ratios (Author, 2023)
Profitability ratios are essential for understanding how a business generates returns on investments. Many ratios can help measure an organization’s earnings, including return on assets, gross profit margin, net profit margin, and return on equity. Corporations rely on return on assets and return on equity to measure profitability by evaluating the revenues and sales generated by their operations.
In the last financial year, the profitability ratios for CVS and Rite Aid differed significantly. Based on the table above, CVS has better profitability performance. The company’s return on assets is lower than expected, but the data suggest a possible increase in the rate as the market is projected to grow.
Rite Aid is experiencing financial distress, and the profitability ratios provide a clear picture. With an adverse outcome of a 150.79% decline in return on equity, the organization shows signs of possible bankruptcy due to significant negative returns. The table above shows the corresponding earnings ratios for the two companies in different areas of profitability, providing investors with an immediate overview of a potential investment.
Table 2: Liquidity Ratios (Author, 2023)
The liquidity ratio is usually used to gain insight into a business’s short-term commitment. The ratios measure a company’s assets and liabilities, helping an investor better understand its financial position. The difference between the current assets and liabilities determines the working capital. Therefore, liquidity ratios help businesses understand the correlation between current liabilities and assets. Calculations of the current and quick ratios provide a clearer picture of their relationship.
From the table above, it is evident that the current assets’ ability to meet the business’s current liabilities has decreased. Based on the two ratios calculated for the two companies, it is evident that current assets cannot meet current liabilities. Each corporation holds more liabilities than assets, which may raise concerns among some investors. However, CVS is still performing better than Rite Aid as the organizations differ in financial performance. The ratios imply a need to improve the business positions and maintain the recommended 1:1 ratio to achieve financial stability and safety.
Table 3: Gearing Ratios (Author, 2023)
Gearing ratios are similar to liquidity ratios in financial analysis, measuring a company’s financial commitment. The difference between gearing ratios and liquidity ratios lies in their duration: gearing ratios measure long-term commitment, while liquidity ratios measure short-term commitment. The measure determines whether a business can sustain non-current liabilities and debt based on its current assets. Therefore, an organization can assess its ability to honor its long-term obligations through gearing ratios.
The gearing ratio calculation considers several factors, including operating cash flows, assets, and equity, which are essential for determining the organization’s financial position relative to its liabilities. The recommended gearing ratio is low, indicating the business has lower financial leverage. Companies with high gearing ratios have greater financial leverage, making them more prone to economic downturns. Based on the figures in the table above, the organizations have high debt ratios, indicating that their long-term debt is high. Downward market trends can have significant financial implications.
Strengths and Limitations of Ratio Analysis
Financial ratios are crucial for understanding company performance due to their benefits. The first benefit emerging from ratio analysis is that it saves time and effort. An organization’s financial assessment can take a long time when large data sets are involved.
Relying on ratios helps organizations measure crucial elements of their financial performance, thereby supporting decision-making. Another benefit of ratio analysis is that it facilitates business comparisons, which is essential for investors. However, the approach alone does not provide a holistic company picture. The simplicity of the method is a drawback, as one relies on only a small set of data to define an organization, even though crucial elements can be found in other data sets.
Altman’s Z-Score Calculation
The Altman Z-score allows organizations and investors to estimate the probability of bankruptcy. The calculations in the approach focus on measuring a company’s financial stability, which supports crucial decision-making. Calculating the scores for both companies revealed that Rite Aid had a score of 1.71, indicating it is in the distress zone. The company may become bankrupt in the next two years. CVS had a 2.29 score, which places it in the gray zone. The score suggests there may be financial distress. A score below 1.8 indicates bankruptcy risk.
Ethical Concerns and Recommendations
The healthcare sector raises several ethical concerns that apply to both organizations. At the top of the list are financial practices that may lead to adversities for both organizations. Financial malpractices are not new in the industry, and Rite Aid has already been cited for providing false statements. The issue can be addressed by ensuring strict compliance with existing regulations.
Matters affecting clients should be addressed as they raise ethical issues. They include responding to customer complaints and managing customer data. Industry trends indicate that consumer information is considered part of business deals in acquisitions, mergers, and partnerships. Ethical issues in the handling of consumer data should be addressed by implementing effective measures to prevent unauthorized access and by obtaining consent from their members. The organizations should also take consumer complaints more seriously, given the ongoing competition from other large retailers.
Buy/Sell/Hold Recommendation
Potential investors should consider buying CVS due to its strong financial performance. While Altman’s z-score indicates possible financial distress, the company’s ratios indicate strong performance, suggesting a high probability of good investment returns. The recommendation for Rite Aid is to avoid purchasing or selling if the investments have already been made. The company has poor performance and a high possibility of bankruptcy, which is a negative factor in any investment.
References
Bilbeisi, K. M., & Narayanaswamy, C. (2022). Did Walgreens and rite aid benefit from their 2017 deal. Pressacademia.
CVS Health. (2018). CVS health completes acquisition of Aetna, marking start of transforming consumer health experience. Leading Health Care Solutions Company | CVS Health.
HHS. (2017). Rite aid agrees to pay $1 million to settle HIPAA privacy case. HHS.gov.
Lynch, K. S. (2021). CVS Health 2021 Annual Report.
Pierson, B. (2022). CVS, Walmart, Walgreens agree to pay $13.8 bln to settle U.S. opioid claims. Reuters.
Sawayd, J., Chen, Y., Shields, C., & Urban, M. (2022). CVS smokes the competition in corporate social responsibility. Center for Ethical Organizational Cultures, 1-25.
Zippia. (2022). Rite aid history: Founding, timeline, and milestones. Zippia – Find Jobs, Salaries, Companies, Resume Help, Career Paths and More.
Appendix
Table 1 – Profitability Ratios Calculations
Table 2 – Gearing Ratios Calculations
Table 3 – Liquidity Ratios Calculations
Table 4 – Altman’s Z-Score Calculation