CVS Health Corporation (CVS) Q1 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the CVS Caremark First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, May 2, 2012. I would now like to turn the conference over to Ms. Nancy Christal, Senior Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and thanks for joining us today. I'm here with Larry Merlo, President and CEO, who will provide a business update; and Dave Denton, Executive Vice President and CFO, who will provide a financial review. Per Lofberg, President of our PBM business; and Mark Cosby, President of CVS/pharmacy, are also with us today and will participate in the question-and-answer session following our prepared remarks. [Operator Instructions] During this call, we'll discuss some non-GAAP financial measures in talking about our company's performance, namely free cash flow, EBITDA and adjusted EPS. In accordance with SEC regulations, you can find the definitions of the non-GAAP items I mentioned as well as the reconciliations to comparable GAAP measures on the Investor Relations portion of our website. And we also encourage you to download the slide presentation we posted on our website this morning. The slides summarize the information on this call as well as key facts and figures around our operating performance and guidance. As always, today's call is being simulcast on our website, and it will be archived there following the call for one year. Finally, please note that we filed our Form 10-Q this morning and it's available through our website. Now before we begin, our attorneys have asked me to read the Safe Harbor statement. During this presentation, we'll make certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. Accordingly, for these forward-looking statements, we claim the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We strongly recommend that you become familiar with the specific risks and uncertainties that are described in the Risk Factors section of our most recently filed annual report on Form 10-K and that you review the section entitled Cautionary Statement Concerning Forward-Looking Statements in our most recently filed quarterly report on Form 10-Q. And now, I'll turn this over to Larry Merlo.

Well, thanks, Nancy, and good morning, everyone. Thanks for joining us today. Well, we're certainly very pleased with the results we posted this morning. We reported adjusted earnings per share from continuing operations of $0.65 for the first quarter, with both retail and PBM results coming in at the high end of our expectations and EPS exceeding the high end of our guidance by $0.02. And while our operating results came in at the high end of our expectations, the EPS beat was driven by financial-related items including the change in inventory accounting methods, interest and lower shares outstanding resulting from our successful capital allocation program, all of which Dave will cover more fully in his update. But overall, this was a terrific quarter with strong results across-the-board including our cash generation. In the first quarter, we achieved the expected $0.03-per-share benefit from the impasse between Walgreens and Express Scripts. For the second quarter, we are projecting a $0.03 to $0.04 EPS benefit from the impasse, assuming the situation remains unresolved for the duration of the quarter. The benefit is expected to be slightly higher than the first quarter, primarily driven by greater operating efficiency in our pharmacies, and we'll also see a full quarter's run rate of ESI script volumes that transferred throughout the first quarter, as well as a modest ramp in the front store benefit from these new customers. As a result of our strong first quarter results, as well as the inclusion of the Walgreens-Express benefit in the second quarter, we are raising our guidance for the full year. We now expect to achieve adjusted earnings per share for 2012 in the range of $3.23 to $3.33, with both ends of the range up $0.05 from our February guidance and up $0.08 from our initial guidance,…

Thank you, Larry, and good morning, everyone. Today, I'll provide a detailed review of our first quarter financial results. I'll also provide guidance for the second quarter and update our guidance for the full year of 2012. But first, let me start with a summary of what we've been doing from a capital allocation standpoint. As you know, we raised our quarterly dividend this year by 30%, our ninth consecutive year with an increase. So in the quarter, we paid approximately $211 million in dividends. And given our earnings expectations for this year, we anticipate a payout ratio of approximately 21%, keeping us comfortably on track to achieve our targeted payout ratio of between 25% and 30% by 2015. In regard to share repurchase, we had $3 billion left under our current authorization when we entered 2012. During the first quarter, we repurchased a total of 18.1 million shares at an average cost of $44.69 per share. So between dividends and share repurchases, we have returned more than $1 billion to our shareholders just in the first quarter. It is my expectation that, at a minimum, we will complete the remaining $2.2 billion on the current repurchase authorization this year. And between dividends and share purchase, we'll allocate roughly $3.8 billion to enhancing shareholder value. And additionally, we continue to be focused on maintaining our credit ratings and have set an adjusted debt-to-EBITDA target of 2.7x. And as I said before, we are committed to our capital allocation program remaining a vital component to driving shareholder value. Through it, we'll take advantage of the powerful cash flow generation capabilities of CVS Caremark, both in the near term as well as the longer term. We generated more than $2.4 billion of free cash in the quarter, an increase of more than…

Okay. Thanks, Dave. And as you've heard already, we had a terrific start to the year and I'm very pleased with our results across the enterprise. And I want to thank our 200,000 colleagues who are working very hard every day to help people on their path to better health. And on behalf of our senior leadership team, I can tell you that we feel very good about our position in the marketplace. And with our stable business and unique suite of assets, we're very well positioned in the industry for continued success. So with that, let's open it up for your questions.

[Operator Instructions] Our first question comes from the line of Deborah Weinswig, Citigroup.

This is Tiffany Konegen [ph] filling in for Deb Weinswig. Can you please provide some detail around the breakdown of the $7 billion of new wins this season?

Well, the biggest single one is the FEP contract, which was the mail order and the specialty business that we didn't have. We also renewed the retail part of that. So the incremental revenue that we got from the FEP contract was roughly $2.5 billion out of the $7 billion, and then the rest of it is made up by a number of other prominent employer and other types of customers.

And also one additional question. Can you provide some more color around your decision to close the 25 Beauty 360 locations? And what is your strategy for beauty and cosmetics going forward?

Yes, let me take the first part of that and then I'll ask Mark to jump in. But as you know, we began this concept about 4 years ago. It was disruptive in the marketplace in terms of offering what had been only distributed through department stores and specialty beauty stores, certainly products not available in the drug channel. And we got tremendous learnings over that 3-, 4-year period. We found that we did not or were not able to secure all of the, call it, Tier 1 brands that would create a holistic offering for that prestige beauty customer. But again, it was a very successful innovative test where we got learnings that we can apply to our beauty business going forward.

So just a little color on top of what Larry said. We clearly believe in the beauty business. It's a huge priority for us as we go forward. It was a 25-store test where we learned a ton. We are in the process right now of a whole beauty reinvention and much of the learning that we took from those tests will be integrated into that beauty reinvention. Other things that we have in the works, I think, that have been effective on the beauty front have been this Beauty Club that we launched this past year, which now has 12 million members, and we continue to look for ways to take that to the next level; and then the successful launch that we had this past year of the Salma Hayek Nuance product exclusive to us. It came with industry accolades and customer accolades, and it is also meeting our sales expectations. So we have a lot happening in the beauty world these days. We are committed to it, and stay tuned for more on that front.

Our next question comes from the line of Lisa Gill of JP Morgan.

I have a couple of questions on the PBM side. First off, when you talk about the one quarter that's already been renewed, can you talk, either Per or Larry, about what your retention rate has been so far? And then secondly, can you also talk about what customers are looking for this year in the selling season? Are you hearing more around narrow networks? And obviously, you're well positioned to provide a narrow network. And what are you seeing competitively with all the disruption, and most notably recently SXC and Catalyst coming together, as well?

Yes, Lisa, let me take the first part, and then I'll ask Per to talk more about what he's seeing in the selling season. As we said in our prepared remarks, it's very early in the selling season. We're not going to provide any numbers around retention rates, and we just think it's way too early to talk about that with where we're at. And we'll certainly talk about that in a more holistic fashion as we approach the fall time frame.

And, Lisa, I think the network question is clearly on the table and I think that it's, I think, in part put on the table by the Express-Walgreens situation. And I think what many customers have realized is that you can actually serve the market very successfully with less than all of the stores around the country. And quite candidly, Express has done a nice job really managing transitions of their retail customers over to other participants in the network. So it is a viable option for customers where they, I think, will be looking at, due to the benefits, the savings that they can get from narrowing down the network somewhat. And they will kind of look at those benefits compared to other types of savings opportunities that are available to them through plan designs and that sort of thing. So I truly expect there to be a healthy discussion around network options as we get into this year's selling season.

Can you help us, Per, to understand what level of savings a customer is looking for? I think that Walgreens has probably said that customers won't move for less than 5%. Our experience has been that, that's not the case, but perhaps you can give us some insights into the level of savings people are looking for, for a more narrow network.

Well, I mean, I think to get to 5% savings, you have to make very drastic cuts in the network. But this business is very price-sensitive, as you know, and customers will value a lot top line reductions of 1%, 2%, 3%. If you're a $1-billion health -- if you're a health plan that spends $1 billion on prescription drugs, 1% saving is $10 million and 2% savings is twice that. So it is very meaningful and I think it's clearly sort of worth consideration by customers.

And, Lisa, I think the wisdom that has been out there was a 2% to 3% number. And I think, to Per's point, that the paradigm that existed in terms of customer disruption, we're kind of living a learning laboratory, and Express has done a very effective job in terms of managing client and member disruption, that I think it's possible as a result of that, that you could see clients evaluate what would it mean for a 1% savings because the disruption is just not what people thought it might be.

Our next question comes from the line of John Heinbockel of Guggenheim Securities.

A couple of things. So first on the PBM, when you think about all of the noise in the marketplace today, do you guys think the benefit in this selling season is more net new wins, the potential for that, or strong -- stronger margins on renewals of contracts that are up for renewal this year? Do you think -- does one, in your mind, weigh more heavily than the other as an opportunity this year?

Well, I mean, I do think that the opportunity to capture new business is probably the more important factor there. What is sort of interesting, I think, in this year's selling season is that in addition to looking at customers that are contemplating a change for January 2013, we actually have quite a substantial number of customers that are looking at 2014 change. And it's unusual, at least in my experience, to have that many customers kind of go out to market almost like a year ahead of plan, if you will. So that is a new phenomenon, I think, this particular season. With respect to the pricing, I really don't see any significant change compared to the past. I mean this is a very competitive business. It will continue to be very competitive business. And when plans go out to bid, they look very much at how to improve the economics of their drug benefits. So I kind of fully expect that the economics will be in the forefront of all of these opportunities.

But is it wrong to think that with all of the -- again, all of the noise, all of the change that's out there that people might be a little more risk-averse right now? And if they're generally happy with your offering, a, there's a greater likelihood they stay with you, and b, it's going to take a lot more to -- price discount to bid them away. Or is that not right?

Well, I mean, I think if you have a successful service relationship with the customer, which is very much the case for us, I mean, typically as the incumbent, you have sort of the upper hand, if you will. And that sort of is what you see reflected in the high retention rates. But that doesn't really translate into a significant sort of margin opportunity. It tends to be very, very competitive and clients are really focused on trying to improve the economics of their drug programs.

All right. And then just finally, Larry, 2 quick things on Retail. When you think about this whole Walgreen-Express ending at some point, how do you think that all plays out in terms of them trying to get business back? They'll probably do transfer coupons, maybe bigger than $25. How does that play out? How do you respond to that? And there should be an annuity benefit that you'll keep some percentage of these customers into '13, correct?

Yes, John, I mean, as we've discussed many times, we know that, that pharmacy customer is the hardest person to lose and the hardest person to get back once you've lost them. The longer this impasse goes on, the stickier that customer is going to be. And they're going to have multiple opportunities to visit a CVS/pharmacy and establish a relationship with their CVS pharmacist. So yes, there will be a retention impact of this if and when the situation gets resolved.

Our next question comes from the line of Dane Leone, Macquarie.

Maybe starting with retail. Can you just kind of go into the plan, as we head into the back half of the year, to convert some of those new pharmacy customers into loyalty program customers or -- yes, I mean, front store shoppers.

Well, it's a big part of our game plan obviously. When we started this past year back in January, we had an aggressive plan, both in terms of marketing and in in-store initiatives, for attracting the ESI customers and then converting them into really whole store shoppers. The plan included marketing, both on the broadcast front as well as on the promotional front, and then we had a significant amount of activity around ExtraCare. We also did a tremendous number of things on the in-store front, including staffing. We added inventory where it was appropriate and then we had a major campaign, which we had -- saw some success that we think we will continue in the second half of the year around ambassadors, which we put in place in our top stores to really teach these new customers the services that we have available in our store, from e-mail capability to texting to ExtraCare and the power of ExtraCare, signing them up to ExtraCare, and of course our ReadyFill initiative. The big focus now is on service because we believe if we provide the best possible service experience, that will then lead to the more likelihood that the folks will retain, but then also use the full store. So we have a number of initiatives in place to convert the customer not only to a loyal pharmacy user, but also to a loyal front store user.

Great. And 2 questions on the PBM side. Just following up on a previous question, I'm just curious about why customers would be sending out RFPs for the 2014 selling season this early, given all the disruption going on. And then another question. There's been some talk with consultants percolating over the last month or so just regarding potential IT issues on the Caremark destination platform. I was just hoping maybe you could just give some color on why we might be hearing about that. And is it just a normal noise? Or is there something more to focus on there?

Yes, I think, let me start with the last one. I mean there are really no IT issues associated with the destination platform. It's a very, very strong platform that will basically be able to handle a tremendous range of plan design requirements, capturing all the segments of our book of business. And we just -- earlier this year, we migrated all of our Med D business over to that platform, which is arguably the most complicated part of our business. So it's a very, very sophisticated state-of-the-art platform that will be able to robustly handle all of our requirements for many years to come. So that's not at all sort of an issue. With respect to the 2014 thing, I don't have any really definitive insight there other than what I've just said. I do think when you have this kind of market disruption that's going on right now and the M&A activities that you're familiar with, those types of changes can be kind of an impetus for many plans simply to just sort of ask themselves, maybe this is a good time for us to look at what's out in the marketplace and figure out what the options -- what options are available for them to provide this cost-effective drug benefit going forward. So I don't have anything other -- any other insights than that to offer.

Our next question comes from the line of Meredith Adler, Barclays Capital.

Larry, you were talking about the likelihood of retaining customers. I was just -- because of the former Walgreen customers. I was just wondering why you're being so conservative about not assuming any of it in the second half. Is that just because you don't know what Walgreens is going to do to try to win those customers back if this dispute is resolved?

Yes, Meredith, we have been -- I think going back to December, we had said that this was a very fluid situation and we certainly can't predict the outcome or let alone the timing of that, and that we would take this one quarter at a time, recognizing, as Mark just pointed out, there's an awful lot of things that we're doing to ensure that those new customers have an outstanding experience and that we convert them to not just a pharmacy customer but a front store customer. So we certainly expect that we'll talk about that at the appropriate time, and we'll provide another update on the next quarterly call in terms of where we're at should the situation be unresolved or resolved, for that matter.

So for CVS enthusiasts, then we should assume that you'd keep some of it?

Yes, Meredith, as we -- someone asked the question earlier, that this has gone on long enough that we would certainly expect some retention to take place, because these customers have had an opportunity to date to visit a CVS pharmacy perhaps 3, 4 times now and to begin to establish a relationship with their pharmacist.

And I think, Meredith -- this is Dave. I think a couple of things, is that one, we want to put in our guidance things that we can control, and obviously, this situation is somewhat outside of our control, number one. But number two, while we've talked about it a lot, we're still pretty early in the process. We've kind of got 1.5 quarters under our belt here. And as time goes on, we'll know much more and we'll have a lot more clarity at that point.

Great. And then I have a question about your Medicare, your PDP business. This is the first quarter -- or first quarter that you've had the Universal American business. And obviously, that's always the weakest quarter for the PDP business. I was just wondering if there have been any surprises in terms of what customers are -- how many prescriptions they're filling and whether you feel comfortable with the premiums that you're getting paid in that business this year?

Yes, no surprises. It's very much on track with our expectations.

Our next question comes from the line of Tom Gallucci of Lazard Asset Management.

Just a follow-up question or 2. In terms of the RFPs that you're getting on the PBM side going into the heart of the selling season here, can you talk about anything that you're seeing that's new or different in terms of what customers are asking for in those RFPs? I mean, you touched a little bit on maybe there's going to be more talk around narrow networks. Something else that we've heard is maybe customers looking to be -- to gain a little more control over the specific retailers that are in their networks as opposed to just sort of relative access points. Can you talk about that and anything other that you're seeing that's new or different?

Yes, I don't see anything to the kind of controlled aspect of your question. I mean, I think, typically, when they specify the parameters around networks, it has to do with access, geographic access, in relation to where their people are. And that's been a fairly broad-based sort of definition of what the network requirements should be based on. And so that's probably -- I mean I don't see any real change there. With respect to other things that people are looking for, one of the things that's sort of on the table right now for many employers is what their plans are with respect to retiree coverage and whether they're going to exit the Retiree Drug Subsidy Program into either a defined contribution or EGWP-type plans. So there's a fair amount of interest in those types of options, especially from large employer customers.

Great. Could you remind us if an employer does make a change there, let's say, toward an EGWP, what's the net effect for you all?

Pretty much -- I mean, it's not a major shift. We obviously -- there's a slight deterioration typically in the mail order aspect of it because in the EGWP plans, you can't have as aggressive mail order incentives as many employers have for their retirees today.

Right, okay. And then what about managed Medicaid? I know you guys are pretty big players there through some of your customers. Do you view that as a longer-term opportunity? Or what's the relative quality of that business and how you look at it?

Well, we certainly see that being a big growth area for us, and many states that have major fiscal problems are clearly kind of looking at switching out of fee-for-service Medicaid programs into managed Medicaid programs to improve the generic dispensing rates, to reduce the dispensing fees and so on, so that seems to be a pretty robust trend right now that certainly had a significant impact this year. But other states will continue to kind of look for those types of savings going forward and that's a very interesting market opportunity for us.

And, Tom, it's also an opportunity on the retail side because it gives us an opportunity -- it's going to vary by state and by PBM, but it gives us an opportunity to work with the PBMs around incentive programs rather than just being focused on just share reimbursement formulas.

And even going back to the network issue, many of these managed Medicaid programs are being set up around retail networks that have less stand-alone pharmacies in it.

Our next question comes from the line of Ed Kelly of Crédit Suisse.

Larry, you've said previously that you did not expect to see a large -- that there'd be a large opportunity out there for new business wins because of the Express-Walgreens dispute. And I guess I don't want to put words in your mouth, but I guess it's because you didn't expect that Express would have that much difficulty in retaining business without Walgreens. Do you still feel that way now that we're sort of in the heat of the selling season and you're getting some feedback from clients?

Yes, Ed, I think we still feel that way. I think as you've heard us comment on several times, Express has done a very effective job in terms of managing the client member disruption so that it's not an issue. And I think, to Per's earlier point, that clients are always looking for ways in which they can capture savings. And I think that we don't know how it'll play out, but I think that there will be and is going to be more chatter around, what does a more restricted network mean in terms of potential cost savings for a respective client?

As we think about more restrictive networks and if we were to take a 5-plus-year view on sort of where the marketplace going, it seems like there's going be more prevalence of restricted networks, which I guess means that the decision to fill a script starts to move from the employee, which it's been historically, to maybe a bit more to the employer. So my question for you is, does that have any impact on the way you think about real estate opportunities, right? For instance, is it as critical going forward to have the high-cost main-on-main location as it's been in the past?

Well, Ed, I think as we look to the future, I think there's a lot of variables that continue to come in play. Keep in mind that part of that real estate strategy is the convenience of the front store offerings and the hours of operation that, that affords, which quite frankly, those elements are very important to clients and their members and I think will be part of the considerations that go into a decision to potentially restrict the networks. So I don't see, as we sit here today, any changes in how we think about our real estate strategy with that in mind.

Okay. And just real quick, last question for you. You brought in a lot of new business this year as well as last year. Can you just comment on how the execution of the new business has been? And does that create any limitation for you on how much business you'd be looking to try to pick up in the upcoming year?

Well, I mean, we did take on a huge amount of business, as you know, in January. And at this point, we're very sort of satisfied with the service levels and the operations around all of these new customers. To be quite candid, there were some moments in very early January when I think our systems were pretty much stressed and we had some spikes in the customer call centers that were -- caused a little bit of consternation. We pretty quickly got behind that, so it's not an issue any longer. But it was quite an effort in early January to manage all this inflow of business. And going forward, I think we obviously take all of these experiences and try to learn from them, try to find areas where we need to strengthen our processes and strengthen our systems, so we can continue to grow this business very successfully. And I don't really see any limitations there whatsoever.

Our next question comes from the line of Larry Marsh, Barclays Capital.

And for what it's worth, Per, to your earlier point, we participated in an industry call last week where several consultants said they are specifically recommending more of their customers go out to bid this year to see if they can capture more savings in their drug spending, because of the change in the industry, as you said. But my question is really I wanted to get you to discuss a little bit, briefly, your success in winning and retaining health plans through your PBM. You've lost what I thought were several visible health plans for '13, but also recently won Blue Cross Blue Shield of Hawaii from Medco. So I guess my question is, do you feel like you can continue to gain share in this segment, specifically addressing the concerns some might have that you're competing with them for Part D lives?

I mean, I do, Larry. We will never doubt that 100%, and the accounts that we lost early this year were -- they were hotly contested and we put in a huge effort on those and, I thought, gave proposals that were very aggressive and what we felt we could justify. So having said that, we're not going to win all the time. I do think that our model, especially with the integration with CVS retail and the MinuteClinic, is of increasing significance to the health plan segment. And that, I think, has become really a focal point for many of the health plan discussions right now, and in particular, health plans that have a significant Medicare population. As you probably know, Larry, the government has basically created the Star rating program as a way to measure health plan performance and also to pay health plans for their performance, and a significant portion of those Star ratings today are dependent on being able to improve adherence and close gaps in care for chronic medication users. And we have a particularly strong suite of capabilities to help health plans in that area. So I'm very, very optimistic about the growth opportunities in the health plan segment going forward.

Right, thanks. And I guess, given that it's public, to the extent Cigna does decide to move forward with its outsourcing of its combined pharmacy benefit assets, why might they consider you given you already service their large competitor, Aetna?

Well, I think, Larry, that obviously, the point that Per just made about our integrated model, I think, creates an awful lot of interest among clients of all types, especially health plans, as you think about more and more of this business becoming B2C and the opportunities that we have to serve varying needs.

Right, okay, great. And a quick -- real quick follow-up. To the extent Express does choose to move forward to terminate Medco's retail network agreement with Walgreens for 2013, are there any notable incremental costs you need to incur to help drive that seamless transition like you did with Express? Or do you feel like you've already learned and you've expensed most of that already with the Express Scripts switch?

Yes, it would be very minimal, Larry. I mean it would be investing in some of the store labor, okay, as Mark talked about, to ensure that, that transition experience becomes a seamless one, because there is some administrative duties that have to be performed as part of that transfer process.

But again, we could easily handle that from a capacity perspective with no issue whatsoever.

Our next question comes from the line of Scott Mushkin of Jefferies.

A couple of housekeeping items, Dave. The inventory change, you said it added $30 million to gross profit. I didn't hear a breakdown on segments. Do you have one?

Yes. It's all Retail Pharmacy because the change only affects our Retail Pharmacy inventory accounting method.

So then I also noticed in the guidance, it seemed you beat by $0.02, you raised by $0.05, if I'm missing something, and you said it was mostly below the line. So it seems like we got an extra $0.02 or...

Well, I think if you look at it, we beat by $0.02 for the quarter and then we raised essentially by $0.03 due to the Walgreens-Express impasse, $0.03 to $0.04.

For the second quarter.

For the second quarter.

For the second quarter, okay. That's great. And then ExtraCare. I didn't hear -- maybe again it's been long, maybe I missed it. ExtraCare cardholder numbers during the quarter, how much was that up?

We didn't provide, Scott, the quarter number, but we currently have 69 million active cardholders. So it's up a couple of million from our last update.

Up a couple of million. And then one final one as I just kind of run through these checks. Is the number of pharmacy shoppers that also use the front end, say, over a 6-month period high? Or is it low?

Well, Scott, the number that we've talked about in the past is when you look at that pharmacy customer and ask, what percent are purchasing something in the front at the time they're picking up their prescription, that number is right around 30%.

But over a 6-month period, I would assume it must be much, much higher, right, because sometimes you're just running in there to pick up your scripts, you're going through the drive-through or whatever. But I guess that's what I'm trying to understand and how -- I think you threw out a 20% conversion on some of these Express people, and I would think over time it could be a lot higher unless I'm missing something.

Yes, Scott, that's true, although we have not quantified that.

Our next question comes from the line of Bob Willoughby, Bank of America Merrill Lynch.

Larry, given your competitors' continuing commitment to your retail excess, are there more aggressive strategic moves you could make to enhance the opportunity? You mentioned the store clustering opportunity. Is that an acceleration of store openings? Or is that more or less in line, just a bit more focused? And can you give us kind of a target market maybe where something like that would happen?

Yes, Bob, I mean, we are following through on our plans. I would say the one thing that we're doing in response to your question is that we have entered new markets over the last couple of years and we have a rich and robust pipeline of stores. So I'll take a market like St. Louis where we have probably 10 or 11 stores today and another 15 or 18 in the pipeline. And we're looking at those new markets to see if we can accelerate what has already been approved as real estate.

Okay, but the overall number of stores more or less in line with what you've guided to over the past.

Absolutely.

Okay. And maybe more bluntly, Larry, what's the economic reason not to ultimately exclude Walgreens from your pharmacy networks -- from your PBM pharmacy networks? Why go restrictive when you can knock them out completely?

Bob, I mean first off, I mean, we have a long-term contract with Walgreens, so that's sort of the basis from which we operate. And as we do with all of our network partners, we will continue to look for sort of the best mix of participating chains and independents and the economics that, that will lead to. So I'm not going to make any predictions one way or another, but certainly having Walgreens in the network on competitive terms is a good thing for our customers.

Would you foresee excluding them? Any meaningful damage to your PBM profitability or growth opportunity?

We have no plans in that regard.

And we wouldn't speculate on that, Bob, as well.

Our last question comes from the line of Ricky Goldwasser, Morgan Stanley.

Question on the inventory change. I just wanted to clarify, is this only an accounting change? Or is this also a signal that you're just kind of like looking potentially at a more structural change to how you think about managing inventory across the organization? And really, what I'm getting at is, are you also looking at potentially consolidating the purchasing for the PBM and retail segment as part of managing the inventory?

Ricky, this is Dave. This is purely an accounting change, although we think it will be helpful to us from an operational perspective over time. Keep in mind that today, the purchasing across our enterprise, both from a PBM perspective and a retail perspective, is already consolidated. So we leverage the purchasing power of our organization across both of our segments.

Just by the fact that you're using 2 different wholesalers?

Correct. But we -- that is correct, but we still purchase them centrally through our operations.

And, Ricky, we use the wholesalers geographic to a large degree actually across our retail enterprise. Okay, everyone. So thanks for your interest and your time today. And if there's any follow-up questions, I know you know how to get ahold of Nancy. So thanks, again.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines. Have a great day, everyone.