CVS To Close 900 Stores Over the Next Three Years

Pharmacy Provider Says It’s Adapting to Changing Customer Habits

CVS Health will be turning to three models for its brick-and-mortar locations, including its traditional pharmacy stores. (CVS Health)

By Linda Moss
CoStar News

November 18, 2021 | 12:48 P.M.

The Woonsocket, Rhode Island-based company said Thursday that following a strategic review it will be shutting about 300 retail sites a year in the next three years, for a total of nearly 10% of its store fleet, as it looks in part to adapt to consumers increasingly ordering medicines online. The company hasn’t identified the locations yet.

Drugstore chains such as CVS and Walgreens for years were in a big expansion mode, but times have been changing. Walgreens has already reduced its real estate footprint. And both it and CVS have been looking to provide primary healthcare — services that customers or patients can’t receive online, such as coronavirus vaccinations — at their sites. Offering primary care at dedicated facilities will now be one of CVS’ focuses for its brick-and-mortar locations, via an expansion of its existing HealthHUB network, according to the company.

For its retail business, the company will be using three models to serve as its community health destinations: sites dedicated to offering primary-care services; an enhanced version of its HealthHUB locations with products and services designed for everyday health and wellness needs; and traditional CVS pharmacy stores that provide prescription services, and health, wellness, personal care and other retail offerings.

In a statement, CVS said it “has been evaluating changes in population, consumer-buying patterns and future health needs to ensure it has the right kinds of stores in the right locations for consumers and for the business.”

A CVS store in New Orleans is one of 12 that the pharmacy chain has put up for sale for $93.4 million. All the locations have lease terms of 12 years or more remaining. (CoStar)

Earlier this week, CVS put a portfolio of a dozen of its stores on the block for $93.4 million. The marketing brochure for the sites said they total 157,600 square feet and are located in the cities of Las Vegas and New Orleans as well as the states of California, Florida, Georgia, Illinois, Indiana, Mississippi, North Dakota and Virginia. The broker handling the sale, Lee & Associates, and CVS didn’t respond to emails seeking comment, so it isn’t known if these stores are among those slated to be shuttered.

The brochure said all the leases for the stores “are corporate guaranteed by CVS Caremark Corp., the second largest retail pharmacy in the U.S., behind Walgreens” and a self-described “strong and highly desirable tenant.”

Online Shift

CVS is a common anchor for shopping centers and strip malls, but Chuck Lanyard, president of The Goldstein Group, a Paramus, New Jersey-based brokerage, said he wasn’t surprised the chain was downsizing.

“Many people now order drugs online, both prescriptions and over the counter,” he said in an email.

CVS said as much in its statement announcing the store closings.

“Our retail stores are fundamental to our strategy and who we are as a company,” Karen Lynch, CVS president and CEO, said. “We remain focused on the competitive advantage provided by our presence in thousands of communities across the country, which complements our rapidly expanding digital presence.”

Drugstores such as CVS were known to pay high rents to secure locations, according to Lanyard, who specializes in retail leasing. On the one hand, the closings will affect smaller strip centers that have CVS as an anchor, and landlords will likely have to reposition the chain’s former spaces to accommodate more than one tenant, he said.

That’s because a typical CVS store averages 10,000 to 12,000 square feet, and there’s no longer a big demand for space that large “primarily due to the history of tenants downsizing or having gone out of business altogether,” according to Lanyard.

Still, CVS typically has a prime location in a shopping center, so that’s an advantage in terms of a landlord filling the space, he said.

“The real shame is that in many rural areas, the pharmacies also become the neighborhood convenience store for all sundries and food items,” Lanyard said.

Two Views

The announcement about the closings was well received by at least one Wall Street analyst, Julie Utterback of Morningstar, who characterized it as an attempt “to improve the quality and efficiency” of its store operations.

“The company has not changed its 2021 adjusted [earnings per share] or cash-flow guidance, and we do not plan to change our fair value estimate or narrow economic moat rating based on this plan either,” Utterback told CoStar News in an email.

“We think long-term equity investors may appreciate the attempt to reduce [CVS’] footprint by shuttering under-performing locations and to improve the prospects of existing stores by driving higher engagement with end users through enhanced HealthHub formats or primary-care services,” Utterback said.

But Neil Saunders, managing director of GlobalData, wrote in a report that “such a savage and wholesale trimming” of the CVS chain shows how neglected the retail business has been.

“CVS will point to the growing demand for shopping online and claim this has lessened the need for stores in some areas,” Saunders said. “As much as there is some truth in this, just as it is the case that CVS has too many overlapping locations, there is another reason big behind today’s decision.”

He described the stores as “shabby,” with many of them “stuck in the past with bad lighting, depressing interiors, messy merchandising and a weak assortment of products.”

And CVS’ competition has increased and is aggressive, according to Saunders.

“Over recent years CVS has lost beauty and personal-care share to other physical retailers like Target, Ulta, Walmart, Sephora and others,” Saunders said. “Even after the closures, CVS will have thousands of locations. Their future relies on proper investments being made in both retail and healthcare services. And it is no good simply investing in health services if the environment in which they are presented is poor: Consumers have choice and will simply take their business elsewhere.”

Executive Moves

CVS also unveiled some executive changes Thursday, including the departure of Neela Montgomery, executive vice president and president of the retail and pharmacy division. She will remain in those posts until the end of the year to ensure a smooth transition of her responsibilities, according to the company.

CVS named Prem Shah to the newly created post of chief pharmacy officer, overseeing the company’s omnichannel pharmacy strategy, effective immediately. Shah joined CVS in 2013 and is currently executive vice president, specialty pharmacy and product innovation.

Shah and Michelle Peluso on Jan. 1 will become co-presidents of CVS’ retail business, with Peluso overseeing front-store strategy and operations. Peluso joined CVS in 2021 as executive vice president and chief customer officer.

Shah will report directly to Lynch in his new role, and Peluso will continue to report directly to Lynch.

CVS estimated it will incur total impairment charges of $1 billion to $1.2 billion and expects to record these charges as an impairment of operating lease right-of-use assets and property and equipment in the three months and year ending Dec. 31.

CVS To Close 900 Stores Over the Next Three Years