Cvs: Drugstore Cowboy

How long can the chain keep its galloping expansion going?

Is CVS Corp. taking growth hormones? On Feb. 9, the drug chain announced it would acquire Detroit-based Arbor Drugs Inc. in a $1.48 billion stock deal. The next day, New York rival Duane Reade got caught in the CVS whirlwind: On the first day of public trading, Duane Reade's shares closed 31% above their IPO pricing, partly on speculation that the chain might be CVS' next target.

It was just a year ago that 1,400-store CVS bought rival Revco D.S. Inc. for $2.8 billion. The Arbor merger will put CVS on a par with Walgreen Co. as the top players in a consolidating market. With Arbor and expansion, J.P. Morgan Securities analyst Mark Husson figures CVS will have 4,100 stores by the end of 1998, earning $514 million on sales of $15 billion, up from $380 million on sales of $12.7 billion in 1997.

Thomas M. Ryan, CEO of CVS' pharmacy unit, won't comment on the Duane Reade rumors. But he says CVS' growth will continue: He plans to add about 320 stores this year. Whether or not CVS pounces again soon, consolidation continues in the drugstore business. The reason: Managed care has cut gross margins on prescriptions from 40% five years ago to about 20%.

Analysts and rivals say CVS is paying a premium for Arbor. "It is probably the highest price per sales dollar in the history of drugstore acquisitions," says Martin L. Grass, CEO of rival Rite Aid Corp. Still, given the pressures on drugstores, CVS believes Arbor is just what the doctor ordered.

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