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Here’s What Happened After CVS Stopped Selling Cigarettes

How it's making up for billions in lost sales.

Last fall, CVS Health Corp CVS HEALTH CORPORATION CVS 0.25% made national news when it announced that it would no longer sell cigarettes and other tobacco products in its 7,850 stores. CVS Health’s decision to opt out of these products cost it $2 billion in annual sales, but does that mean CVS Health’s decision was the wrong one? Let’s take a closer look.

Tough call
The company’s tobacco exit took a toll on its fourth-quarter financial performance. In the quarter, sales at the front of CVS Health’s stores took a drubbing. Typically, steady prescription volume means that foot traffic leads to sales throughout the rest of the store that climb a few percentage points per year. However, without tobacco, CVS Health reports that front-end revenue tumbled 6.1%. If you take out tobacco’s impact on results, then front-end sales would have grown by about 2%. That means exiting the tobacco business lopped off more than 8% from what would otherwise have been steady results.

Looking at the tobacco drag another way, CVS Health reports that lost tobacco sales caused retail operating profit to slip by 1.3% in Q4. If not for tobacco’s weight, operating profit would have increased by 1.7%.

Long-term gain?
Walking away from $2 billion isn’t an easy choice, but the sting of losing those sales was lessened by the fact that CVS Health generates tens of billions of dollars per year from employers and health-insurance companies that contract with it to manage their prescription drug plans.

Those healthcare payers hate that they have to pay out a tremendous amount of additional money every year to care for people suffering from tobacco-related illnesses, such as lung cancer.

Since CVS Health’s pharmacy benefit management, or PBM, business generated a whopping $23.88 billion in revenue last quarter, up from $20.2 billion the year before, it’s far more important to the broader picture than the cigarette business. That suggests that if the company can leverage the elimination of tobacco products from its stores to win additional employers and insurers for its PBM segment, its anti-tobacco stance will prove to be brilliant.

In due time
It’s going to be a while before we know whether that will end up being the case. The company admitted in its first-quarter earnings conference call that the benefits it’s seeing from its anti-tobacco stance are more qualitative than quantitative.

Although it’s nice to hear that the company is getting positive feedback from clients regarding the decision, investors need to see top- and bottom-line deals that can fuel future growth. In the meantime, investors will need to be OK with knowing that tobacco headwinds will weigh down results, at least until we get at least a year beyond the decision to stop marketing them.

Fortunately, CVS Health’s other businesses are growing fast enough to make up for the tobacco shortfall. In the first quarter, same-store sales in its back-of-store pharmacies grew 4.2% versus a year ago. Most of that growth has come from an aging and increasingly-insured America, but some is thanks to the company’s Minute Clinic in-store healthcare clinics. The company opened 15 new clinics last quarter, bringing the total number of clinics to 986, and leading to Minute Clinic revenue growth of 21% from last year.

Looking ahead
Exiting the cigarettes business came at a price, but a good argument can be made that the lost tobacco business, which is low margin, will prove to be a short-term speed bump and that over time, long-term gains in other parts of its business will more than make up for the decision. Overall, I think the various puts and takes associated with CVS Health’s cigarette decision will prove to be a bit of a wash. Instead, I think it makes more sense to focus on the fact that script growth is likely to go much higher over the coming decade because of aging baby boomers. After all, that’s the trend that will move the needle for shareholders over the long haul.

Todd Campbell has no position in any stocks mentioned.

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5 Reasons This Could Be the Worst Road Trip Weekend Ever

Crazy traffic is a given. But that's hardly the only reason Memorial Day could be a nightmare for road trips.

In a new survey conducted for Citi cards, 54% of Americans said they prefer to travel on non-holiday weekends rather than holidays like Memorial Day. The most common reasons given for staying home for the holidays were traffic (47%) and high costs (30%).

Maybe these people are on to something. Here are a handful of reasons why the Memorial Day weekend is shaping up as a less-than-ideal time for getting on the road. As you’ll see, traffic and high costs are only part of the problem.

Horrendous Traffic
The forecast from AAA calls for 37.2 million Americans to travel at least 50 miles from home over the big holiday weekend. That’s an increase of nearly 5% compared with Memorial Day 2014, and it would represent the heaviest amount of traffic on this weekend in a decade. Only a small portion of these travelers will fly: roughly 9 out of 10 will be in automobiles.

Cheap gas, an improving jobs scene, and pent-up demand after a long and brutally snowy winter in the Midwest and Northeast have been cited as reasons why so many Americans are more than ready to kick off summer with a road trip. The East Coast will be particularly clogged with cars. An estimated 890,000 vehicles will drive Maine Turnpike over the weekend, a 5.2% increase over last year. Nearly 1 million New Jersey residents are expected to travel this weekend—in a state that has a population of just 9 million. “Motorists need to pack their patience along with the sunscreen as they set out for the Jersey Shore,” a spokesperson from AAA Mid-Atlantic cautioned.

Aggressive Police Enforcement
To cope with holiday weekend crowds, police will be turning Miami Beach into a “mini police state,” in the words of the Miami New Times, with road closures, parking bans, barricades, one-way traffic loops, and police checkpoints in popular areas. Around the country, police have stated they will be aggressively enforcing everything from so-called “slow poke” left-lane driving rules to laws mandating the wearing of seatbelts with a national “Click It or Ticket” campaign.

Crackdowns on DUIs will be widespread as well—in Arizona, California, Pennsylvania, and Tennessee, to name just a few states. In the latter, police may employ “No Refusal” tactics, which allow them to seek a search warrant and draw blood from someone who is suspected of driving under the influence and refuses a breathalyzer test. The same kind of enforcement will be used by police in parts of Texas, where the “No Refusal” process can be applied not only to car drivers, but those behind the wheel of boats as well.

Drunk Drivers, Car Accidents
The main reason for ratcheting up enforcement of DUI laws and other driving regulations on Memorial Day weekend is that, hopefully, it sets the tone for the entire summer season. The holiday weekend starts what’s known as the 100 Deadliest Days on American roads (for teens especially), and the goal is to crack down hard at the beginning to save lives in the long run. According to Mothers Against Drunk Driving, 146 people were killed in crashes involving impaired drivers during Memorial Day weekend in 2013.

Data from the National Safety Council forecasts that there will be 383 fatalities from traffic accidents over the upcoming Memorial Day weekend, and car crashes will result in another 46,300 injuries. What’s scary is that historically, the days around the July 4 holiday are even more dangerous for drivers and passengers than Memorial Day.

Texters, Tailgaters, Bikers, New Yorkers
Texting behind the wheel is the behavior most likely to induce road rage from fellow motorists, according to a new survey conducted on behalf of Expedia. Tailgaters and left-lane hogs tied for second place in terms of aggravating people on the roads, while New York City came out on top for having the country’s rudest drivers. All of this rage has manifested itself in drivers yelling or using profanity behind the wheel (26% admitted to doing so), and by employing a rude gesture that probably involves a single finger (17% admit to this, while 53% say they’ve been on the receiving end).

Memorial Day is also a traditional time for many biker rallies, which have been known to bring about traffic (and worse) in the past, and which this year may cause locals, police, and motorists to be more on edge than usual given the recent biker shootout that left nine people dead in Waco, Texas. Major motorcycle gatherings are planned this weekend in Washington, D.C., Red River, N.M., and Myrtle Beach, S.C.,, among other places.

Soaring Motel Rates
Hotel rates are up roughly 5% nationally compared to last year. That doesn’t seem like a big deal. But the one segment of the lodging industry favored by road trippers has spiked to an outsized degree. According to AAA, rates at supposedly cheap two-diamond properties are averaging $144 per night, a rise of 16% over last year. That kind of sharp increase may more than offset the money you’re saving thanks to cheap gas.

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