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CVS Health (CVS +10%) delivers Q3 earnings in-line with its previously lowered forecast and topples revenue expectations in the quarter, sufficient to alleviate recent selling pressure today. Shares were hovering near recent four-year lows ahead of today's report, triggered by a cascade of setbacks, from a weakening retail environment to rising medical costs. This series of obstacles ultimately led to a shakeup at the CEO position, with David Joyner replacing Karen Lynch three weeks ago. Mr. Joyner did not announce significant changes today. Instead, he is opting to stay the course of the company's ongoing restructuring actions to better contend with constantly bubbling costs.

• These rapidly rising medical costs were immediately evident in CVS's medical benefit ratio (MBR), which ballooned by 950 bps yr/yr to 95.2% in Q3. Similar to its health insurance peers, including Humana (HUM) and UnitedHealth Group (UNH), CVS is battling higher utilization and acuity in Medicaid related to the impact of redeterminations. On the bright side, CVS believes that signs of stabilization materialized toward the end of the quarter.
• Part of CVS's restructuring actions includes shuttering hundreds of stores, targeting 900 by year's end and announcing plans to close additional locations in 2025, tracking closely to rival Walgreens Boots Alliance (WBA), which is also amid a downsizing. Alongside a weakening retail environment, competitive pressures are intensifying. Amazon (AMZN) is seeking to disrupt the brick-and-mortar pharmacy industry, mentioning last month that it can deliver to 95% of first-time Amazon Pharmacy customers within two days.
• Still, as AMZN pointed out, physical pharmaceutical retailers comprise over 90% of prescriptions dispensed in the U.S., and CVS makes up a hefty piece of that pie, boasting $32.42 bln in revenue within its Pharmacy & Consumer Wellness segment in Q3, a 12.3% jump yr/yr. The double-digit gains were supported by increased prescription volume and drug mix, with same-store volumes edging +9.1% higher.
• While Health Services, which includes Caremark, recorded a 5.9% dip in revs yr/yr to $44.13 bln, dragged down by the previously disclosed loss of a large client and continued pharmacy client price improvements, Health Care Benefits enjoyed an encouraging 25.5% bump in revs to $33.0 bln, aided by growth in Medicare and commercial product lines. As a result, CVS grew total revs by 6.3% to $95.43 bln, nicely ahead of analyst forecasts.

Management is not provide formal guidance at this time but did offer some commentary. If trends persist at current levels, CVS's MBR could swell by over 700 bps yr/yr in Q4. The company also remains cautious in its outlook for front-store sales. However, come 2025, management sees a few tailwinds that could help spur upward momentum as next year unfolds, including improvement in contributions from its Health Care Benefits segment, which should result in margin recovery. CVS also expects growth in its Health Services business. While CVS sees 2025 as a transition year, it is confident it is taking the necessary steps to position it for long-term growth in subsequent years, an uplifting view.